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Loblaw Companies Limited 2005 Annual Summary Store Formats

Loblaw Companies Limited (“Loblaw” or the “Company”) is ’s largest food distributor and a leading provider of general merchandise products, drugstore and financial products and services. Through its various operating banners, Loblaw is committed to providing with a one-stop destination in meeting their food and everyday household needs. This goal is pursued through a portfolio of store formats across the country. Loblaw is known for the quality, innovation and value of its food offering. It also offers Canada’s strongest control label program, including the unique President’s Choice and brands. While food remains at the heart of its offering, Loblaw seeks to change Canadians’ perceptions of what a can be. Loblaw stores provide a wide, growing and successful range of products and services to meet the everyday household needs of Canadian consumers. In addition, President’s Choice Financial services offer core banking, a popular MasterCard®, PC Financial auto, home, travel and pet insurance as well as the PC points loyalty program. Loblaw seeks to achieve its business objectives through stable, sustainable and long term growth. Its willingness to assume prudent operating risks is equaled by its commitment to the maintenance of a strong balance sheet position. In executing its strategies, Loblaw allocates the resources needed to invest in and expand its existing markets. It also maintains an active product development program. Loblaw is highly selective in its consideration of acquisitions and other business opportunities. Given the competitive nature of its industry, Loblaw also strives to make its operating environment as stable and as cost effective as possible. It works to ensure that its technology systems and logistics enhance the efficiency of its operations. Over 134,000 full-time and part-time employees execute its business strategy in more than 1,000 corporate and franchised stores from coast to coast. This makes Loblaw one of Canada’s largest private sector employers. It strives to contribute to the communities it serves and to exercise responsible corporate citizenship.

Many Strengths, One Vision

Contents 2005 Annual Summary 2 Financial Highlights The 2005 Annual Report consists 5 Report to Shareholders of this 2005 Annual Summary 7 Operational Directory and the 2005 Financial Report. 9 Operational Review 16 Community Support 17 Corporate Social Responsibility 18 Summary of Corporate Governance Practices 20 Board of Directors and Corporate Officers Customer Focus Strategic Business Initiatives

...aligning for success.

Product Innovation National Systems and Supply Chain

2005 Annual Summary Loblaw Companies Limited 1 Financial Highlights(1)

For the years ended December 31, 2005 and January 1, 2005 2005 2004 ($ millions except where otherwise indicated) (52 weeks) (52 weeks) Operating Results Sales $ 27,801 $ 26,209 Sales excluding impact of variable interest entities(2) 27,423 26,209 Adjusted EBITDA(2) 2,132 2,125 Operating income 1,401 1,652 Adjusted operating income(2) 1,600 1,652 Interest expense 252 239 Net earnings 746 968 Cash Flow Cash flows from operating activities 1,489 1,443 Capital investment 1,156 1,258

Per Common Share ($) Basic net earnings 2.72 3.53 Adjusted basic net earnings(2) 3.35 3.48 Dividend rate at year end .84 .76 Cash flows from operating activities 5.43 5.26 Book value 21.48 19.74 Market price at year end 56.37 72.02 Financial Ratios Adjusted EBITDA margin(2) 7.8% 8.1% Operating margin 5.0% 6.3% Adjusted operating margin(2) 5.8% 6.3% Return on average total assets(2) 11.2% 14.2% Return on average shareholders’ equity 13.2% 19.2% Interest coverage 5.6:1 6.9:1 Net debt(2) to equity .66:1 .71:1 Operating Statistics square footage (in millions) 48.5 45.7 Average corporate store size (square feet) 56,100 53,600 Corporate stores sales per average square foot ($) 579 592 Same-store sales growth 0.2% 1.5% Number of corporate stores 670 658 Number of franchised stores 402 400 (1) For financial definitions and ratios refer to the Glossary of Terms on page 68 of the 2005 Financial Report. (2) See Non-GAAP Financial Measures on page 33 of the 2005 Financial Report.

Forward-Looking Statements This Annual Report, which consists of the Annual Summary and the Financial Report, contains forward-looking statements which reflect management’s expectations regarding the Company’s objectives, plans, goals, strategies, future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements include expected sales and earnings prospects for 2006. Forward-looking statements are typically identified by words or phrases such as “anticipates”, “expects”, “believes”, “estimates”, “intends” and other similar expressions.

These forward-looking statements are not guarantees, but only predictions. Although the Company believes that these statements are based on information and assumptions which are current, reasonable and complete, these statements are necessarily subject to a number of factors that could cause actual results to vary significantly from the estimates, projections and intentions. Such differences may be caused by factors which include, but are not limited to, changes in consumer spending and preferences, heightened competition including new competitors and expansion of current competitors, the ability to realize anticipated cost savings, including those resulting from restructuring and other cost reduction initiatives, the ability to execute restructuring plans effectively, the Company’s relationship with its employees, results of labour negotiations including the terms of future collective bargaining agreements, changes to the regulatory environment in which the Company operates now or in the future, changes in the Company’s tax liabilities, either through changes in tax laws or future assessments, performance of third-party service providers, public health events, the ability of the Company to attract and retain key executives, and supply and quality control issues with vendors. The Company cautions that this list of factors is not exhaustive. These factors and other risks and uncertainties are discussed in the Company’s materials filed with the Canadian securities regulatory authorities from time to time, including the Risks and Risk Management section of the Company’s Management’s Discussion and Analysis in its Financial Report.

The assumptions applied in making the forward-looking statements contained in this Annual Report include the following: economic conditions in 2006 do not materially change from those expected, patterns of consumer spending are reasonably consistent with historical trends, no new significant competitors enter our markets nor does any existing competitor significantly increase its presence, anticipated cost savings from restructuring activities are realized as planned, continuing future restructuring activities are effectively executed, there are no material work stoppages in 2006 and the performance of third-party service providers is in accordance with expectations in the upcoming year.

Potential investors and other readers are urged to consider these factors carefully in evaluating these forward-looking statements and are cautioned not to place undue reliance on them. The forward-looking statements included in this Annual Report are made only as of the filing date of this Annual Report and the Company does not undertake to publicly update these forward-looking statements to reflect new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events contained in these forward-looking statements may or may not occur. The Company cannot assure that projected results or events will be achieved.

2 2005 Annual Summary Loblaw Companies Limited Aligning for success involves...

• offering four distinct store formats while continuing to operate under a multi-banner approach;

• relocating 132 employees and their families from to , and from to Calgary in order to focus operational efforts towards maximizing opportunities;

• a multi-year restructuring of the Company’s supply chain to a more efficient network of fewer, yet larger facilities;

• consolidating seven administrative offices from across southern into one national head office and Store Support Centre; and

• investing resources in repositioning the Company for the longer term in response to today’s changing competitive landscape, and absorbing the short term costs associated with that investment.

Return on Average Basic Net Earnings, Adjusted Basic Total Return on $100 Investment Shareholders’ Equity Net Earnings(1) and Dividend Rate (includes dividend reinvestment) per Common Share ($) ($)

20% $3.60 $200

15 2.70 150

10 1.80 100

5 .90 50

0 .00 0 2001 2002 2003 2004 2005 2001(2)2002 2003 (3) 2004 2005 2000 2001 2002 2003 2004 2005

Return on Average Dividend Rate per Common Share at Year End Loblaw Companies Limited Shareholders’ Equity Basic Net Earnings per Common Share TSX Food and Staples Retailing Sub Index FivcFive Year Average Return Adjusted Basic Net Earnings per Common Share (1) S&P/TSX Composite Index (1) See Non-GAAP Financial Measures on page 33 of the 2005 Financial Report. (2) Basic Earnings per Common Share before Goodwill Charges. (3) 2003 was a 53 week year.

2005 Annual Summary Loblaw Companies Limited 3 W. , Chairman and John A. Lederer, President

4 2005 Annual Summary Loblaw Companies Limited Report to Shareholders

In 2005, Loblaw Companies Limited moved closer to completing one of the largest transformations in its history. We were challenged by the size and impact of the short term costs associated with executing certain elements of the transformation.

At the same time, we were confident that this initiative was These execution-centred challenges are being addressed and absolutely necessary to ensure that Loblaw can continue to resolved. We expect that the negative impact of these changes compete successfully, to grow and to generate meaningful value will be absorbed by the end of the second quarter of 2006. over the longer term. We expect that adjusted basic net earnings per common share(1) We had anticipated and disclosed that the impact of our performance will improve during the second half of 2006. transformation would adversely affect sales and earnings during And we are confident that Loblaw will emerge from this process the past year. We also indicated our willingness to incur these as a stronger and even more competitive company. consequences in order to complete the process and to realize the long term benefits associated with it. Nonetheless, the Acting on Our Strategic Imperatives short term costs turned out to be greater and more prolonged Even as the Company worked through this transformation than expected, as evidenced by our results for 2005. Sales during the past year, it remained focused on the day-to-day excluding the impact of variable interest entities(1) rose by business of serving customers. These efforts were guided 4.6% to $27.4 billion. Adjusted operating income(1) decreased by a number of strategic imperatives reflecting the Company’s 3.1% to $1.6 billion. And adjusted basic net earnings per commitment to becoming more relevant in meeting the food common share(1) fell 3.7% to $3.35. On an unadjusted basis, and everyday household needs of Canadians. Significant sales, operating income and basic net earnings per common progress was recorded in pursuit of this objective and against share were $27.8 billion, $1.4 billion and $2.72, respectively. these imperatives during the past year.

Anticipating a Changing Environment Strengthening Our Food Offering Food remains at the heart of our Loblaw has long demonstrated an ability to anticipate change business. In 2005, a number of steps were taken to strengthen in the marketplace and to act accordingly. The Company’s that offering and a renewed commitment was made to the transformation of recent years reflects a thorough analysis of the fresh component. New products and programs were introduced fast-changing retail landscape and of our place in it. That landscape in the produce, meat, bakery, seafood and deli departments is increasingly marked by such factors as an over-supply of and other areas. Centralized food merchandising teams were retail square footage, the consumer’s desire for a value-driven established to realize opportunities of scale and develop shopping experience, and the presence of low-cost global retailers. common practices. And new collaborative initiatives were Based on this assessment, the Company developed a undertaken with suppliers. comprehensive strategy designed to fortify its competitive The Company also increased the number of food offerings position, maintain its leadership role in meeting the food and under two of Canada’s most trusted and recognized control label everyday household needs of Canadians, and generate long-term brand names – President’s Choice and no name. These products value for shareholders. reinforced the qualities for which the brands are known – In pursuit of this strategy, Loblaw implemented a number innovation, quality, value and focus on the customer. of transformative changes to its structure and operations. These This focus was especially evident in the Company’s response changes were designed to align the different yet connected to the consumer’s interest in health and nutrition. Well-received parts of our business into a more unified, efficient, cost-effective initiatives included the publication of the first Healthy Insider’s and nationally-focused organization. Report, featuring PC Blue Menu, PC Mini Chefs and additional We made significant progress in pursuit of these goals PC Organics products. in 2005. A number of office facilities were consolidated. A number of functions were reorganized. A national general Growing Our General Merchandise and Drugstore Business Loblaw has merchandise organizational structure was established and demonstrated that an excellent food offering can generate general a new head office and Store Support Centre in , merchandise and drugstore sales. In 2005, the Company moved Ontario that is now home to 2,000 employees was completed. to grow these increasingly important elements of our business. We have acknowledged on previous occasions that the A national, integrated organizational structure was established and Company may have taken on too much, too quickly during the was relocated to the new head office and Store Support Centre. past year. This was especially evident in the delays surrounding The general merchandise offering was focused on conveying the execution of planned changes to our national systems such qualities as product innovation, great value and differentiation platform and supply chain. These delays disrupted the flow of in the marketplace. The number of products and services inventory to our stores, which affected sales and earnings. We offered continued to increase. More than 1,000 of these items concluded, however, that the long term interests of the business, are now offered under the President’s Choice brand. In addition, our shareholders and other stakeholders would be best served we continued to build the scope and credibility of our everyday by our completing these measures as quickly as practicable. household items to supplement our powerful seasonal offerings.

(1) See Non-GAAP Financial Measures on page 33 of the 2005 Financial Report. 2005 Annual Summary Loblaw Companies Limited 5 Report to Shareholders

We believe that the strategic transformation will fully align the elements of our business. This will provide the concentration of focus and resources needed to achieve the desired levels of growth going forward.

As a result, the general merchandise and drugstore business will examine how to simplify its business operations, including helped Loblaw become more important in more aspects of the the flow of goods from vendors to store shelves. home. In 2005, we introduced the PC Bath and Body line of Developing Our Greatest Resource During the past year, we introduced products, issued the first PC Home Insider’s Report, and launched a number of measures designed to develop our greatest resource the PC Mobile line of prepaid cellular phone services and – our employees. The Leadership Means Business program related accessories. Most recently, the Style line continued to expand. This program is designed to enhance the of apparel for adults has been introduced, offering unique style capabilities of managers in leading and engaging the men and at value-oriented prices in an easy shopping environment. women on the Company’s front line. Its goal is to identify, train, support and strengthen leadership at the store level. Tailoring Formats to Individual Markets In 2005, the Company continued The Store Managers’ Council completed its first full year of to execute its proven strategy of offering four distinct store operation in 2005. This group of twelve managers from different formats: superstores, hard discount stores, conventional stores regions focuses on such issues as improving communication, and warehouse clubs. This multi-format approach provides leadership development and training programs for store personnel. us with the flexibility to serve the needs of specific markets The Council also attended and reported to the Company’s in each region of the country. annual management conference in 2005. These actions reflected Our format strategy was supported by a capital investment the commitment made by senior management to consult with program exceeding $1 billion. Under this program, steps and listen to people in the stores, and to act on their feedback were taken to increase our emphasis on value footage. This and recommendations. reflected the consumer’s increasing preference for value and Other leadership-related initiatives of the past year were a one-stop shopping experience. We continued the successful designed to encourage collaboration, alignment and leadership expansion of The model into across the store network. These measures included off-site Ontario. As well, discussions continued with organized labour leadership sessions for store personnel as well as visits to and to explore competitive opportunities. These opportunities tours of individual stores. The Company also took steps that will include converting existing conventional stores into superstores provide a common approach to leadership coaching, program in response to local market conditions and where it makes execution and business development at the store level. economic sense to do so. In addition, Loblaw will continue to invest, where appropriate, in its strong conventional format. Aligning for Success While the past year had its share of short term challenges, Supporting Our Stores Steps were taken in 2005 to provide it also saw a number of positive developments that bode consumers with a consistent and unique shopping experience well for the future. We believe that the strategic transformation across the store network. New and re-formatted banner will fully align the elements of our business. It will provide identities were developed, store exteriors were remodeled, store the concentration of focus and resources needed to achieve architecture and decor were updated, and new in-store signage the desired levels of growth going forward. It also reflects was introduced. As well, a 40,000 square foot facility was our commitment to manage the business for the longer term. established to provide opportunities to pre-test department As we have done successfully in the past, we believe that layouts and signage, as well as to conduct product education we are taking the significant steps required to ensure that Loblaw and other training programs. These and other measures helped continues to grow, to succeed and to provide sustainable value to convey the selection, quality, service and value underlying in a changing landscape. the Company’s offering to consumers. The Company’s achievements in any given year are Work also continued on the conversion to one national attributable to our employees, shareholders, customers, vendors systems platform across a number of functions, including store and other partners. We are especially appreciative of their efforts ordering, purchasing, and inventory tracking. In addition, the and commitment during the past year, which was marked by Company moved forward on the restructuring of its supply chain. short term challenge and long term opportunity. We are Upon completion, this measure is expected to improve the confident that the benefits of our transformation will reward the movement of inventory, reduce wait times, improve service confidence shown by all our valued stakeholders in this great levels to the stores, and lower costs. Measures were also taken Canadian enterprise. to simplify the Company’s distribution network. This entailed the closure of several smaller facilities and the transfer of various functions to larger and more cost-effective centres. The year also saw the opening of a new, third-party owned and operated general merchandise warehouse and distribution centre for W. Galen Weston John A. Lederer eastern Canada. In addition, the Company began a process that Chairman President

6 2005 Annual Summary Loblaw Companies Limited Operational Directory

(includes age and years of service) John A.Lederer Mark Butler Bernard J. McDonell Carmen Fortino R. Glen Gonder (50 and 29 years) (45 and 30 years) (51 and 12 years) (47 and 21 years) (47 and 28 years) President Atlantic Operations Operations Ontario Operations Western Operations

Preston D. McLean Dave Mock N. Deane Collinson Raymond P. Daoust (44 and 20 years) (46 and 23 years) (51 and 21 years) (52 and 34 years) Quebec Merchandising The Real Canadian Superstore and * André Fortier Vince Scorniaenchi David A. Berg *in Newfoundland and Labrador (48 and 5 years) (47 and 33 years) (44 and 28 years) Tom Cogswell Maxi (56 and 39 years) and Daniel Dufresne Robert Pols Atlantic SaveEasy (48 and 4 years) Robert Adams (47 and 7 years) and Cash & Carry Retail Operations (45 and 22 years) SuperValu, Shop Easy Foods and Lucky Dollar Foods Jocyanne Bourdeau (38 and 2 years) Tim R. Staffen Loblaws and Maxi & Cie. (47 and 17 years) Serge Racette and Valu-mart (47 and 3 years) , L’intermarché, Axep

Robert A. Balcom David K. Bragg David R. Jeffs Peter McMahon Stephen A. Smith (44 and 12 years) (57 and 22 years) (48 and 27 years) (effective February 2006) (48 and 20 years) General Counsel Real Estate General Merchandise Operations Supply Chain Financial Control and Reporting, Employee Development and David C. Boone Roy R. Conliffe Richard P. Mavrinac Paul D. Ormsby Services and Loss Prevention (36 and 13 years) (55 and 24 years) (53 and 23 years) (54 and 23 years) The Real Canadian Wholesale Club Labour Relations Treasury, Tax, Risk Management Information Technology and Galen G. Weston and Cash & Carry and Investor Relations Food Sourcing and Procurement (33 and 8 years) Joseph Jackman Corporate Development (46 and 1 year) Pietro Satriano Marketing (43 and 4 years) Control Label Development

National Head Office and Store Support Centre opened in 2005.

2005 Annual Summary Loblaw Companies Limited 7 Superstores in Ontario take on a fresh, new look.

At The Real Canadian Superstore, customers enjoy an exciting shopping experience where “Super never cost so little”.

8 2005 Annual Summary Loblaw Companies Limited Operational Review

As the heart of its business, the Company took steps in 2005 to further strengthen its store network and to make those stores more relevant to Canadian consumers.

This was pursued, in large part, through the Company’s In support of that commitment, Loblaw refreshed assortment of formats operating under a number of the appearance of many of its stores during the past banners. This multi-format approach ensures that the year. These alterations were designed to reinforce Company can provide the store model and the product the stores’ position in the marketplace as destinations offerings that best suit the consumer preferences for value, quality and selection. Store exteriors were and business environment in any given market area. enhanced through remodeling and new signage. Interiors Throughout 2005, the Company continued to featured new architecture, decor and in-store signage. execute a significant capital investment program in And several banners received new or re-formatted support of its stores and formats. A particular focus of identities as part of this multi-faceted process. this program was the growth of the superstore format In 2005, the Company took other, less visible, in Ontario. This strategic initiative continued to be well steps to support its store network. A number of received and to generate positive results. In addition, operational and administrative functions were brought the Company continued its collaborative dialogue together so that they could work more effectively. with the representatives of its unionized employees. A new head office and Store Support Centre was This dialogue focused on such business opportunities opened in Brampton, Ontario. And a testing facility as expanding the superstore format by converting was opened, in which training programs can be conventional locations where it makes sense to do conducted and potential department layouts can so. This strategy helps to address the consumer’s be examined before being introduced into the stores. increasing preference for value and convenience. These measures were taken to ensure that the It also reflects the Company’s stated commitment to Company’s many strengths support the vision of provide Canadians with a one-stop shopping destination a more aligned organization. in meeting their food and everyday household needs.

Over 48 million Over 134,000 Over 1,700,000 square feet of retail space employees contribute to customers enjoy the convenience from coast to coast. Loblaw’s successes. of shopping at our stores every day.

2005 Annual Summary Loblaw Companies Limited 9 PC products deliver great taste and real value in every aisle.

Healthy eating never tasted so good! Our PC Blue Menu line of over 200 products offers Canadians a healthier alternative.

10 2005 Annual Summary Loblaw Companies Limited Operational Review

Loblaw has a proven ability to anticipate and respond to changing consumer preferences in an increasingly competitive landscape and is committed to meeting more of the food and everyday household needs of consumers from coast to coast.

The Company fulfills this commitment by providing and health. A number of measures initiated in 2005 an increasing range of food, general merchandise demonstrated the continuing leadership role played by and drugstore offerings, many under the extremely the Company and by President’s Choice. The PC Blue successful President’s Choice, no name and Exact Menu line of healthier, nutritious foods was launched control label brand names. and the PC Mini Chefs portfolio was expanded. Along with its store network, food remains at And the Company’s first Healthy Insider’s Report the heart of the Company. In 2005, Loblaw continued was published. These actions further enhanced the its focus on the fresh component of its food business reputation of President’s Choice for innovative, by introducing new products and programs and affordable and convenient products. In addition, the implementing a number of operational measures. PC points program offered through President’s Choice These measures included the creation of a centralized Financial services continued to play an important food merchandising function designed to achieve part in the Company’s consumer loyalty initiative. opportunities of scale and to identify common practices. To complement its excellent food offering, In addition, the Company engaged its suppliers in the Company continued to add to its assortment of developing more effective ways of working together. general merchandise, drugstore and financial products These measures were aimed at further reinforcing and services, a number of which were offered under consumer confidence in the Company’s food the President’s Choice brand. New offerings, like offering and increasing customer loyalty to its stores. the PC Mobile line of prepaid cellular phone services This loyalty was earned by building on the proven and the Joe Fresh Style line of apparel for adults, success of the President’s Choice brand, especially in are helping the Company become more relevant to addressing the growing consumer interest in nutrition its customers’ varied lifestyles.

Over 300 Over 1,900 Over 500,000 items featured in the new control label products President’s Choice PC Home Insider’s Report. introduced in 2005. Deep Dish Pizzas sold at launch.

2005 Annual Summary Loblaw Companies Limited 11 Over 50,000 items delivered to our stores daily.

A wide variety of breads and rolls are baked fresh daily in-store.

12 2005 Annual Summary Loblaw Companies Limited Operational Review

While many of the Company’s transformative changes are visible to the consumer, some less visible but equally important initiatives were completed in 2005 while others will continue into the first half of 2006.

These measures are designed to assist in the pursuit Loblaw has also taken steps to strengthen the of the Company’s strategic imperatives, making leadership skills among its employees. An in-house, Loblaw more streamlined, efficient and cost-effective tailored leadership program has been developed to in everything it does. enhance the capabilities of managers. This program These transformative changes include the is designed to identify, support and strengthen conversion to a national systems platform across a leadership at the store level reflecting the commitment number of functions, such as store ordering, purchasing, of senior management to engage in dialogue with and inventory tracking. The Company also moved store personnel, and to act on their feedback and forward on the restructuring of its supply chain network. recommendations. An important aspect of this Upon completion, this measure will improve the leadership program is the Store Managers’ Council. movement of inventories, enhance efficiencies, and The Council’s rotating membership of twelve managers lower costs. The Company also continued to simplify meets to discuss and develop recommendations on its distribution network in 2005 with the closure ways to improve and better serve the Company’s stores. of a number of smaller facilities and the transfer of During 2005, these discussions covered issues such their functions to larger, more cost-effective centres. as training programs, leadership development and The past year also saw the opening of a third-party communication among employees. owned and operated general merchandise warehouse Other store-focused leadership initiatives are equally and distribution centre serving eastern Canada. important in promoting leadership and cooperation. In addition, the Company began a process that will A number of these measures were pursued during examine how to simplify the flow of goods to stores. the past year. In order to ensure consistency, common approaches were developed in such areas as leadership coaching, business development and program execution.

Number of Stores

53 Atlantic SaveEasy 67 Lucky Dollar Foods 52 Shop Easy Foods 51 Atlantic Superstore 97 Maxi 25 SuperValu 14 Dominion* 15 Maxi & Cie 68 Valu-mart (in Newfoundland and Labrador) 130 No Frills 51 Your Independent Grocer 103 Extra Foods 107 Provigo 52 Zehrs Markets 21 Fortinos 88 The Real Canadian Superstore 418 Cash & Carry and other banners 95 Loblaws 37 The Real Canadian Wholesale Club

*Trademark used under license.

2005 Annual Summary Loblaw Companies Limited 13 Operational Review

Geographic Divisions and Banners

Corporate Franchised Associated Independent Stores Stores Stores Accounts Warehouses 41 43 18 2 12 311 67 4 14 2,096 5 34 15 26 1,657 2 Manitoba 24 4 39 15 1 Ontario 169 257 16 86 6 Quebec 252 22 341 2,533 4 22 23 6 296 2 36 22 1 523 2 5 3 1 151 Newfoundland and Labrador 16 7 9 500 2 Total 670 402 472 7,858 26

Corporate Stores

2005 2004 2005 Sq. Ft. 2004 Sq. Ft. Stores (in millions) Stores (in millions) Corporate Stores Beginning of year 658 35.3 646 32.6 Opened 47 3.6 53 4.2 Closed (40) (1.4) (43) (1.5) Transferred from franchised stores 5 0.1 2 End of year 670 37.6 658 35.3 Average store size (in thousands) 56.1 53.6 Analysis by size: More than 60,000 sq. ft. 234 23.1 217 20.9 40,000–60,000 sq. ft. 167 8.0 164 7.9 20,000–40,000 sq. ft. 165 5.0 168 5.0 Less than 20,000 sq. ft. 104 1.5 109 1.5 670 37.6 658 35.3 Sales by corporate stores ($ millions) $ 21,110 $ 20,109 Sales per average square foot ($) $ 579 $ 592

Corporate Stores Sales Corporate Stores per Average Square Foot Square Footage ($) (thousands of sq. ft.)

$610 40,000

585 30,000

560 20,000

535 10,000

510 0 2001 2002 2003(1) 2004 2005 2001 2002 2003 2004 2005

Corporate Stores Sales > 60,000 sq. ft. per Average Square Foot 40,000–60,000 sq. ft. (1) 2003 was a 53 week year. < 40,000 sq. ft.

14 2005 Annual Summary Loblaw Companies Limited Independent Stores and Accounts

2005 2004 2005 Sq. Ft. 2004 Sq. Ft. Stores (in millions) Stores (in millions) Franchised Stores Beginning of year 400 10.4 397 9.7 Opened 22 0.9 33 1.3 Closed (17) (0.3) (28) (0.6) Transferred to corporate stores (5) (0.1) (2) Transferred from associated stores and independent accounts 2 End of year 402 10.9 400 10.4 Average store size (in thousands) 27.1 26.0 Associated Stores 472 519 Independent Accounts 7,858 6,669 Warehouses 26 32 Sales(1) to independent stores and accounts ($ millions) $ 6,691 $ 6,100 (1) Includes sales of variable interest entities at retail.

Average Store Size Retail Square Footage and Number of Stores and Percentage Increase (thousands of sq. ft.)

60,000 700 50,000 20%

45,000 525 37,500 15

30,000 350 25,000 10

15,000 175 12,500 5 Number of Stores of Number Average Store Size – sq. ft. sq. – Size Store Average 0 0 0 0 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005

Average Franchised Store Size Franchised Average Corporate Store Size Corporate Number of Franchised Stores Percentage Increase Number of Corporate Stores

2005 Annual Summary Loblaw Companies Limited 15 Community Support

Loblaw Companies Limited endeavours to be an active participant in the various communities which it serves and supports the philanthropic goals of the “IMAGINE” campaign.

Acting with its employees, the Company supports and activities and initiating work experience programs for the contributes to local organizations through its various operating physically and developmently challenged. The following are divisions by sponsoring numerous charitable fundraising some examples of our community involvement in 2005.

A message from Peggy Hornell, Director, Fundraising and Administration, President’s Choice Children’s Charity:

President’s Choice Children’s Charity is dedicated to helping children who are physically or developmentally challenged.

President’s Choice Children’s Charity had an outstanding year in 2005. Through the President’s Choice Decadent cookie promotion, and other national and regional fundraising activities, the President’s Choice Children’s Charity raised $6.6 million.

This money will be directed towards helping more than 725 children across Canada.

One of the children helped in the past year is 18-year-old Justin, who has cerebral palsy. Confined to a wheelchair, he loves school and dreams of attending Northern Alberta Institute of Technology so he can become a computer game developer. Justin is unable to speak however, and finds himself separated from his classmates as a result.

President’s Choice Children’s Charity funded a computer communication device that allows him to participate in conversations with his classmates and teachers. Justin’s Mom says that it has “given Justin independence and a chance to say what he is thinking and not have someone talk for him”.

Thanks to the support of Loblaw, its employees and customers, President’s Choice Children’s Charity will continue to make difficult lives a little easier.

Cambridge Memorial Food Banks (Across Canada) ROM Foundation Hospital Foundation Supporting non-profit organizations Contributions fund galleries, Supports the hospital in raising that procure, warehouse and curatorial research, and The W. Garfield Weston Foundation funds for medical equipment, distribute food to member social programs for children and is a Canadian charitable foundation infrastructure and education service agencies. ensure long term stability of associated with the Company. priorities in order to meet the the . Its grants are directed primarily to healthcare needs of the community. Grocery Industry Foundation... specific organizations in the fields Together (G.I.F.T.) United Way– Centraide of education and environment. Canadian Red Cross Provides funding to various Ontario (Across Canada) These include the Canadian Merit Tsunami Relief charities dedicated to assisting Committed to improving lives Scholarship Foundation, the Organizing disaster recovery efforts children facing physical, intellectual and building community by Children First: School Choice Trust, for those affected by the tsunami or economical challenges. engaging individuals and the Royal Ontario Museum and the in Asia by providing basic needs of mobilizing collective action. Innovation Centre food, clothing, shelter, and first Heart and Stroke Foundation at the . From aid, and participating in long term of Canada coast to coast, the Foundation also recovery programs, in union with Dedicated to improving the health works with the Nature Conservancy international Red Cross agencies. of Canadians by preventing of Canada to protect critical habitat. and reducing disability and death from heart disease and stroke through research, health promotion and advocacy.

16 2005 Annual Summary Loblaw Companies Limited Corporate Social Responsibility

Loblaw Companies Limited and its subsidiaries are committed to responsible corporate citizenship. This includes providing a safe workplace for employees, contributing to its local communities, respecting the environment, and promoting health and food safety, while offering products that provide meaningful choices to consumers.

These commitments are instilled throughout the organization can be recycled through local municipal programs. As well, and are overseen by the Environmental, Health and Safety customers are offered a choice in grocery checkout packaging, Committee of the Board of Directors (the “Board”) of the Company, including conventional plastic shopping bags, re-usable plastic and by the full Board itself. The Board reviews and monitors bags, recyclable corrugated containers and re-usable bins. policies, procedures, practices and compliance in these fields. Also, this commitment extends to the administration, support Initiatives in these areas are undertaken through any and corporate offices of the Company, where waste minimization combination of four approaches: by the Company itself, and recycling activities are actively employed. These programs in conjunction with other industry members, as part of promote the diversion of plastics, metals, paper, corrugate industry-government partnerships, and in direct cooperation and organics from landfill. with governments. Promoting Health and Food Safety Respecting the Environment in a Sustainable Way The commitment to health promotion and food safety is reflected The commitment to the environment is demonstrated in the Company’s participation in standard-setting initiatives, in its through measures in such areas as environmental awareness operations, in its dealings with suppliers, and in the information and management, energy efficiency, waste management provided to customers. and packaging. The Company supports national food initiatives designed to promote health and food safety. It works to ensure that Environmental Awareness Management Measures in this area are driven products meet or exceed the food safety requirements of the by an Environmental Management System designed to achieve Canadian Food Inspection Agency. It also participates in national the structured integration of environmental programs into the joint industry-government initiatives in the development of Company’s operations. This system also focuses on ensuring the food safety programs for different parts of the food supply control of high-risk activities, the management of hazardous system. Suppliers are informed of the standards to which they wastes, and the control and reduction of ozone-depleting must adhere and are expected to observe them. Manufacturing substances. Environmental risk assessments and audits of and food handling procedures, employee education and training ongoing and newly acquired or established operations are programs, compliance systems and independent audits are conducted on a regular basis by in-house environmental staff among the measures used to promote food safety within as well as by external parties. In addition, employees receive the Company’s stores and other operations. Through packaging education and training that enable them to recognize and and labelling of control label products, customers are informed minimize environmental risks and to respond to any incidents of ingredients and whether certain products may have come that might occur. in contact with one or more allergens. This allows consumers Energy Efficiency Ongoing efforts are directed towards improving to make more fully informed purchasing decisions. energy efficiency throughout Loblaw, including cooperating with federal and provincial agencies. The areas in which these Offering Products that Provide Meaningful Choices efficiencies are pursued include the lighting used inside and The Company provides a wide range of product offerings to meet outside stores, energy-efficient refrigeration, the use of energy an equally wide range of consumer preferences. This includes in corporate facilities, and the fuels used in the Company’s the provision of alternative food products that provide customers transportation and other operations. In September 2005, Loblaw with meaningful choices. opened its new, energy efficient head office and Store Support The environmentally responsible collection of President’s Centre in Brampton, Ontario. Furthermore, Loblaw has Choice GREEN products and the hundreds of President’s Choice established partnerships and commitments with federal and Organics products have been developed to satisfy customers’ provincial agencies to achieve energy conservation at the retail environmental or health preferences. The organic products store level in a realistic and focused manner, including the are third-party certified as organic, are in packages containing use of innovative refrigeration system technology. recycled materials, and are priced to be competitive with similar national brands. The Natural Value department in many Waste Management and Packaging Waste management programs stores is a one-stop source for health food needs, offering a follow a three-stage process – source reduction, diversion selection of healthy and nutritious alternative foods, vitamins to re-use or recycling and, finally, disposal. Loblaw is a and herbal products. long-standing supporter of, and financial contributor to, such The focus on healthy and nutritious food products is further industry-sponsored programs as Corporations Supporting demonstrated by two recent product initiatives under the Recycling and the Composting Council of Canada. This President’s Choice label. The line of PC Mini Chefs products commitment is evident throughout the Company’s operations. has been designed to fit into a healthy eating plan for young In-store photo labs recycle disposable cameras, processing fluids children consistent with the federal government’s “Nutrition and even film cuttings. Post-consumer recycled material is Recommendations for Canadians”. These products have been used in private label packaging to the greatest extent possible approved by a team consisting of prominent nutrition researchers without compromising the safety or quality of the product. and registered dieticians. The PC Blue Menu line of products Packaging of control label products is labelled as appropriate offers adults a variety of alternatives lower in fat, calories with the symbols that help customers identify materials that and sodium, and higher in fibre.

2005 Annual Summary Loblaw Companies Limited 17 Summary of Corporate Governance Practices

The Board of Directors (the “Board”) and management of the Company believe that sound corporate governance practices will contribute to the effective management of the Company and its achievement of strategic and operational plans, goals and objectives.

The Company seeks to attain high standards of corporate governance Individual directors may, with the approval of the lead director, and when appropriate adopts “best practices” in developing its retain an outside advisor at the expense of the Company. approach to corporate governance. The Company’s approach to The Board requires that management seek directors’ review and corporate governance is consistent with National Policy 58-201 – approval of: Corporate Governance Guidelines (the “Guidelines”). The Governance, • strategic corporate direction and corporate performance objectives; Employee Development, Nominating and Compensation Committee • multi-year and annual business, capital and operating plans and (“Governance Committee”) regularly reviews its corporate governance budgets; practices and considers any changes necessary to maintain the • material capital expenditures, acquisitions, divestitures and Company’s high standards of corporate governance. restructurings; and Director Independence • investment outside of the ordinary course of business. The Board is comprised of a majority of independent directors. The These matters are in addition to those matters which are required by Governance Committee has reviewed each director’s factual law to receive Board consideration and approval. circumstances and relationships with the Company to determine The Board regularly receives reports on the operating results of whether he or she is independent within the meaning of the the Company, as well as timely reports on various matters, including Guidelines. The Guidelines provide that a director is independent if he insurance, pensions, corporate governance, health and safety and or she has no material relationship with the Company or its affiliates treasury matters. that would reasonably be expected to interfere with the director’s Ethical Business Conduct independent judgment. The Company’s Code of Business Conduct (the “Code”), sets out the Board Leadership Company’s long-standing commitment of requiring adherence to high Mr. W. Galen Weston is Chairman of the Board. Mr. Weston has a standards of ethical conduct and business practices. The Code is significant common interest with other shareholders with respect to reviewed annually to ensure it is current and reflects best practices value creation, the well being of the Company, and the performance in the area of ethical business conduct. Directors, officers and of its publicly listed securities. The Board has established a position employees of the Company are required to comply with the Code description for the Chairman of the Board. The Board has also and must acknowledge their commitment to abide by the Code on appointed an independent director, Anthony S. Fell, to serve as lead a periodic basis. The Code is available on the Company’s website, director. The lead director provides leadership to the Board and www.loblaw.ca. particularly to the independent directors. He ensures that the Board The Code also deals with conflicts of interest. Should an officer, operates independently of management and that directors have director or employee have a conflict of interest with respect to any an independent leadership contact. As part of his responsibilities, matter, that individual is required to bring the conflict to the attention the lead director meets periodically with the other directors of the Ethics and Conduct Committee and, if a director has a conflict to obtain insight as to areas where the Board and its Committees with respect to any matter, he or she may not participate in any can operate more effectively and to ensure the Board is able discussion or vote on the conflict matter. The Code also addresses to discharge its responsibilities independently of management. such issues as the protection of confidential information and the The Board has developed a position description for the lead director. protection and proper use of the Company’s assets. The Company has established an Ethics and Conduct Committee Board Responsibilities and Duties which reviews all material breaches of the Code. The Ethics and The Board, directly and through its Committees, supervises the Conduct Committee also oversees implementation of the Code, management of the business and affairs of the Company with the educating employees regarding the Code and reviews the Code goal of enhancing long-term shareholder value. The Board reviews annually to determine if it requires revision. the Company’s direction, assigns responsibility to management for The Company encourages the reporting of unethical behaviour achievement of that direction, develops and approves major policy and has established an Ethics Response Line, a toll-free number that decisions, delegates to management the authority and responsibility any employee or director may use to report conduct which he or she in day-to-day affairs and reviews management’s performance and feels violates the Code or otherwise constitutes fraud or unethical effectiveness. The Board’s expectations of management are conduct. A fraud reporting protocol has also been implemented to communicated to management directly and through Committees of ensure that fraud is reported to senior management in a timely manner. the Board. In addition, the Audit Committee has endorsed procedures for the The Board approves the Company’s corporate goals and receipt, retention and handling of complaints regarding accounting, objectives, operating budgets and strategies, which take into account internal control or auditing matters. These procedures are available the opportunities and risks of the business. Members of the Board at www.loblaw.ca. attend an annual all-day strategy session with management to The Company has adopted a Vendor Code of Conduct that sets discuss and review the Company’s strategic plans and opportunities. out the Company’s expectations of its vendor community with respect In addition, management’s strengths and weaknesses are discussed. to ethical conduct and social responsibilities. The Vendor Code deals Through the Audit Committee, the Board oversees the Company’s with such matters as labour practices, respect for the environment risk management framework and assesses and evaluates the integrity and compliance with various laws. of the Company’s internal controls and management information systems. Through the Governance Committee, the Board oversees succession planning and compensation for senior management as well as Board nominees.

18 2005 Annual Summary Loblaw Companies Limited Board Committees the Executive Committee allows them to operate independently from There are five committees of the Board: Audit; Governance, management such that shareholders’ interests are protected. Employee Development, Nominating and Compensation; Pension Each Committee has a formal mandate and a position and Benefits; Environmental, Health and Safety and Executive. description for the Chair established by the Board. Both the The Audit Committee is comprised solely of independent mandate and position description are reviewed annually. Copies directors. All Committees are comprised solely of non-management of the Committees’ mandates are available on the Company’s directors, in each case, with a majority of members being website, www.loblaw.ca. independent directors except for the Executive Committee. The The following is a brief summary of some of the responsibilities Board believes that the composition of its committees other than of each Committee.

Audit Committee governance practices consistent with high standards of corporate All members of the Audit Committee must be independent and governance. As part of its mandate, the Governance Committee financially literate as required under applicable rules. The Audit identifies and recommends candidates for nomination to the Board Committee is also responsible for supporting the Board in overseeing as directors, monitors the orientation program for new directors and the integrity of the Company’s financial reporting and internal controls maintains a process for assessing the performance of the Board and over financial reporting, disclosure controls, internal audit function its Committees as well as the performance of individual directors and its compliance with legal and regulatory requirements. The Audit and discharging the Board’s responsibilities relating to compensation Committee’s responsibilities include: and succession planning for the Company’s senior employees. The • recommending the appointment of the external auditor; Governance Committee’s specific responsibilities include: • reviewing the arrangements for and scope of the audit by the • identifying candidates for membership on the Board and evaluating external auditor; the independence of the directors; • reviewing the independence of the external auditor; • assisting in directors’ orientation and assessing their performance • reviewing and approving the Company’s hiring policies regarding on an on-going basis; partners and professional employees of the present and former • shaping the Company’s approach to corporate governance and external auditor of the Company; recommending to the Board corporate governance principles to be • considering and evaluating with management the adequacy and followed by the Company; effectiveness of internal controls over financial reporting and • discharging the Board’s responsibilities relating to compensation disclosure controls and procedures and reviewing any proposed and succession planning for the Company’s senior employees; and corrective actions; • determining the process for the compensation of directors and • reviewing and monitoring the Company’s policies relating to ethics executive officers. and conflicts of interests; The Board appointed the Chairman of the Governance Committee, • overseeing procedures for the receipt, retention and follow up of who is an independent director, to serve as lead director. complaints regarding the Company’s accounting, internal controls and auditing matters and the confidential anonymous submission Pension and Benefits Committee by employees of concerns regarding such matters; The Pension and Benefits Committee is responsible for: • reviewing and monitoring the internal audit function of the • reviewing the performance of the Company’s and its subsidiaries’ Company; pension plans and pension funds; • reviewing the integrity of the Company’s management and • reviewing and recommending managers for the fund’s portfolio; information systems; • reviewing the performance of pension fund managers; • reviewing and approving the audit fees paid to the external auditor • reviewing and approving the assumptions used, the funded status and pre-approval of non-audit related fees to the external auditor; and amendments to the Company’s and its subsidiaries’ pension • discussing and reviewing with management and the external plans; and auditor the Company’s annual and interim consolidated financial • receiving reports regarding level, types and costs of the Company’s statements, key reporting matters and Management’s Discussion employee benefit plans. and Analysis and Annual Information Form; Environmental, Health and Safety Committee • reviewing disclosure containing financial information based on the The Environmental, Health and Safety Committee is responsible for Company’s financial statements; and reviewing and monitoring environmental, food safety and workplace • reviewing with management the principal risks of the Company’s health and safety policies, procedures, practices and compliance. business and the systems and processes implemented to manage these risks. Executive Committee The Executive Committee possesses all of the powers of the Board Governance, Employee Development, Nominating and Compensation Committee except the power to declare common dividends and certain other The Governance Committee is responsible for overseeing the powers specifically reserved by applicable law to the Board. The compensation of directors and executive officers. The Governance Executive Committee acts only when it is not practicable for the full Committee is also responsible for developing and maintaining Board to meet.

Other Corporate Governance Matters through these documents as well as by means of news releases, its Disclosure Policy The Board has reviewed and adopted a corporate website and investor relations meetings. Disclosure Policy to deal with the timely dissemination of all material Disclosure Committee A Disclosure Committee comprised of senior information. A copy of the Disclosure Policy is available on the management of the Company oversees the Company’s disclosure Company’s website, www.loblaw.ca. The Disclosure Policy, which is process as outlined in the Disclosure Policy. The Disclosure reviewed annually, establishes consistent guidance for determining Committee’s mandate includes ensuring that effective disclosure what information is material and how it is to be disclosed to avoid controls and procedures are in place to allow the Company to satisfy selective disclosure and to ensure wide dissemination. The Board, all of its continuous disclosure obligations including certification directly and through its Committees, reviews and approves the requirements. The Disclosure Committee is also responsible for contents of major disclosure documents, including unaudited interim ensuring that the policies and procedures contained in the Company’s and audited annual consolidated financial statements, Management’s Disclosure Policy are in compliance with regulatory requirements. Discussion and Analysis, the Annual Information Form, and the Proxy Circular. The Company seeks to communicate to its shareholders

2005 Annual Summary Loblaw Companies Limited 19 Board of Directors and Corporate Officers

Directors

W. Galen Weston, O.C., B.A., LL.D.1* Anthony S. Fell, O.C.3*,4 Nancy H.O. Lockhart 5 G. Joseph Reddington, B.A., J.D.3 Chairman, Loblaw Companies Limited; Chairman, RBC Capital Markets Inc.; Chief Administrative Officer, Frum Retired Chairman, Director and Chairman and President, George Former Chairman and Chief Executive Development Group; Former Vice Chief Executive Officer, Breuners Weston Limited; Chairman, Holt, Officer, RBC Dominion Securities; President, Home Furnishings Corporation; Renfrew & Co., Limited, Brown Thomas Former Deputy Chairman, Royal Bank Corporation; Former Chair of the Board Former Chairman and Chief Executive Group Limited, & Co. Ltd.; of Canada; Chairman, Munich of Trustees, Ontario Science Centre; Officer, The Signature Group; President, The W. Garfield Weston Reinsurance Group of Companies; Former President, Canadian Club; Former President and Chief Executive Foundation; Director, Associated British Director, CAE Inc., BCE Inc.; Former Chair, Canadian Film Centre. Officer, ; Director, Foods plc; Member, Advisory Board, Chairman of the Board of Trustees, Ansett Worldwide. Pierre Michaud, C.M.5* Columbia University. University Health Network. Chairman and Director, Provigo Inc.; T. Iain Ronald, M.B.A., B. LAW., F.C.A.2*,4* Paul M. Beeston, C.M., B.A., F.C.A.2,5 Anthony R. Graham 1,3,4 Vice Chairman, Laurentian Bank Chairman, TransAlta Power Ltd., Former President and Chief Executive President and Director, Wittington of Canada; Director, Bombardier TransAlta Cogeneration Ltd., BFI Officer, Major League Baseball; Investments, Limited; President and Recreational Products Inc., Canada Inc.; Former Vice Chairman, Former President, Toronto Blue Jays Chief Executive Officer, Sumarria Inc.; Gaz Métro Inc., Old Port of Canadian Imperial Bank of Commerce; Baseball Team; Director, President’s Former Vice Chairman, National Bank Corporation Inc. Director, President’s Choice Bank, Choice Bank. Financial; Chairman and Director, Holt, Renfrew & Co., Limited, Leon’s Thomas C. O’Neill, B. COMM., F.C.A.2 President’s Choice Bank, Graymont Furniture Limited, Strongco Inc., Gordon A.M. Currie, B.A., LL.B. Retired Chairman and former Ltd.; Director, , Allied Properties REIT. Executive Vice President, Secretary Chief Executive Officer, Holt, Renfrew & Co., Limited, and General Counsel, George Weston PricewaterhouseCoopers Consulting; Joseph H. Wright, B.A.2,3,4 Brown Thomas Group Limited, Limited; Former Senior Vice President Director, President’s Choice Bank, Managing Partner, Barnagain Capital; Power Corporation of Canada, Power and General Counsel, Centrica Nexen Inc., BCE Inc., OTPP Former President and Chief Executive Financial Corporation, Provigo Inc., North America; Former Partner, (Ontario Teachers Pension Plan), Officer, Swiss Bank Corporation Selfridges & Co. Ltd. Blake, Cassels & Graydon LLP. St. Michael’s Hospital, Adecco S.A.; (Canada); Chairman and Trustee, John A. Lederer, B.A.1 Vice Chairman, Board of Governors, BFI Canada Income Fund; Chairman, Camilla H. Dalglish, B.A.5 President, Loblaw Companies Limited; Queen’s University. Hollinger Inc.; Director, President’s Director, The W. Garfield Weston Former Executive Vice President, Choice Bank. Foundation, The Nature Conservancy Loblaw Companies Limited; Director, of Canada; Former President, 1. Executive Committee Food Marketing Institute; Founder, The Civic Garden Centre. 2. Audit Committee President’s Choice Children’s Charity. 3. Governance, Employee Development, Nominating and Compensation Committee 4. Pension and Benefits Committee 5. Environmental, Health and Safety Committee * Chairman of the Committee

Officers (includes age and years of service)

W. Galen Weston, O.C. (65 and 34 years) Roy R. Conliffe (55 and 24 years) David G. Gore (35 and 4 years) Lisa R. Swartzman (35 and 12 years) Chairman of the Board Senior Vice President, Vice President, Legal Counsel, Vice President, Treasurer Labour Relations Compliance and Regulatory Affairs, John A. Lederer (50 and 29 years) Ann Weir (43 and 12 years) Privacy and Ethics Officer President Louise M. Lacchin (48 and 22 years) Vice President, Internal Audit Services Senior Vice President, Finance J. Bradley Holland (42 and 12 years) and Systems Audit David K. Bragg (57 and 22 years) Vice President, Taxation Executive Vice President Franca Smith (42 and 17 years) Laurel MacKay-Lee (36 and 6 years) Senior Vice President, Michael N. Kimber (50 and 21 years) Controller, Financial Projects David R. Jeffs (48 and 27 years) Financial Control Vice President, Legal Counsel Executive Vice President Irene Pinheiro (38 and 13 years) Galen G. Weston (33 and 8 years) Joyce C. Lee (34 and 9 years) Controller, Financial Analysis Richard P. Mavrinac (53 and 23 years) Senior Vice President, Vice President, Financial Reporting Executive Vice President Marian M. Burrows (51 and 27 years) Corporate Development Lucy J. Paglione (46 and 22 years) Assistant Secretary Peter McMahon (effective February 2006) Geoffrey H. Wilson (50 and 19 years) Vice President, Pension and Benefits Executive Vice President Swavek A. Czapinski (31 and 7 years) Senior Vice President, Investor Mark A. Rodrigues (48 and 19 years) Assistant Treasurer Paul D. Ormsby (54 and 23 years) Relations and Public Affairs Vice President, Internal Executive Vice President M. Darryl Hanstead (31 and 7 years) Manny DiFilippo (46 and 14 years) Control Compliance Assistant Treasurer Stephen A. Smith (48 and 20 years) Vice President, Risk Management George D. Seslija (50 and 26 years) Executive Vice President and Strategic Initiatives Walter H. Kraus (43 and 17 years) Vice President, Real Estate Senior Director, Environmental Affairs Robert A. Balcom (44 and 12 years) Development Senior Vice President, Secretary and General Counsel

20 2005 Annual Summary Loblaw Companies Limited Shareholder and Corporate Information

National Head Office Common Dividend Policy Value of Common Shares Independent Auditors and Store Support Centre It is the Company’s policy to For capital gains purposes, the KPMG LLP Loblaw Companies Limited maintain a dividend payment equal valuation day (December 22, 1971) Chartered Accountants 1 President’s Choice Circle to approximately 20% to 25% of cost base for the Company Toronto, Canada Brampton, Canada the prior year’s adjusted basic is $0.958 per common share. Annual Meeting L6Y 5S5 net earnings per common share.(1) The value on February 22, 1994 Loblaw Companies Limited Annual Tel: (905) 459-2500 was $7.67 per common share. Common Dividend Dates Meeting of Shareholders will be held on Fax: (905) 861-2206 The declaration and payment of Registrar and Transfer Agent Thursday, May 4, 2006 at 11:00 a.m. Internet: www.loblaw.ca quarterly dividends are made Computershare Investor Services Inc. at the Metro Toronto Convention Centre, Registered Office subject to approval by the Board 100 University Avenue Constitution Hall, Toronto, Canada. 22 St. Clair Avenue East of Directors. The anticipated record Toronto, Canada Toronto, Canada and payment dates for 2006 are: M5J 2Y1 M4T 2S7 Tel: (416) 263-9200 Record Date Payment Date Tel: (416) 922-8500 Toll free: 1-800-663-9097 Fax: (416) 922-7791 March 15 April 1 Fax: (416) 263-9394 June 15 July 1 Toll free fax: 1-888-453-0330 Stock Exchange Listing Sept. 15 Oct. 1 and Symbol Dec. 15 Dec. 30 To change your address, eliminate The Company’s common shares are multiple mailings, or for other listed on the Normal Course Issuer Bid shareholder account inquiries, and trade under the symbol “L”. The Company has a Normal please contact Computershare Course Issuer Bid on the Investor Services Inc. Common Shares Toronto Stock Exchange. 63% of the Company’s common shares are owned beneficially by W. Galen Weston and George Weston Limited.

At year end 2005 there were 274,054,814 common shares outstanding, 5,124 registered common shareholders and 100,737,979 common shares available for public trading.

The average daily trading volume of the Company’s common shares for 2005 was 322,169.

Trademarks Investor Relations Additional financial information has Ce rapport est disponible Loblaw Companies Limited and Shareholders, security analysts and been filed electronically with various en français. its subsidiaries own a number of investment professionals should direct securities regulators in Canada trademarks. Several subsidiaries are their requests to Geoffrey H. Wilson, through the System for Electronic This Annual Summary was printed in Canada licensees of additional trademarks. Senior Vice President, Investor Document Analysis and Retrieval on Cougar Opaque, manufactured totally chlorine-free with 10% post-consumer fibre, These trademarks are the exclusive Relations and Public Affairs at the (SEDAR) and with the Office of the at a mill independently certified as meeting property of Loblaw Companies Limited Company’s National Head Office Superintendent of Financial the procurement provisions of the Sustainable Forestry Initiative® (SFI) standard. or the licensor and where used in or by e-mail at [email protected] Institutions (OSFI) as the primary this report are in italics. regulator for the Company’s subsidiary, President’s Choice Bank. The Company holds an analyst call shortly following the release of its quarterly results. These calls are archived in the Investor Zone section of the Company’s website.

(1) See Non-GAAP Financial Measures on page 33 of the 2005 Financial Report. Loblaw Companies Limited 1 President’s Choice Circle Brampton, Canada L6Y 5S5

Tel: (905) 459-2500 Fax: (905) 861-2206

loblaw.ca ...aligning for success.

Loblaw Companies Limited 2005 Financial Report Financial Highlights(1)

For the years ended December 31, 2005 and January 1, 2005 2005 2004 ($ millions except where otherwise indicated) (52 weeks) (52 weeks) Operating Results Sales $ 27,801 $ 26,209 Sales excluding impact of variable interest entities(2) 27,423 26,209 Adjusted EBITDA(2) 2,132 2,125 Operating income 1,401 1,652 Adjusted operating income(2) 1,600 1,652 Interest expense 252 239 Net earnings 746 968 Cash Flow Cash flows from operating activities 1,489 1,443 Capital investment 1,156 1,258

Per Common Share ($) Basic net earnings 2.72 3.53 Adjusted basic net earnings(2) 3.35 3.48 Dividend rate at year end .84 .76 Cash flows from operating activities 5.43 5.26 Book value 21.48 19.74 Market price at year end 56.37 72.02 Financial Ratios Adjusted EBITDA margin(2) 7.8% 8.1% Operating margin 5.0% 6.3% Adjusted operating margin(2) 5.8% 6.3% Return on average total assets(2) 11.2% 14.2% Return on average shareholders’ equity 13.2% 19.2% Interest coverage 5.6:1 6.9:1 Net debt(2) to equity .66:1 .71:1 Operating Statistics Retail square footage (in millions) 48.5 45.7 Average corporate store size (square feet) 56,100 53,600 Corporate stores sales per average square foot ($) 579 592 Same-store sales growth 0.2% 1.5% Number of corporate stores 670 658 Number of franchised stores 402 400

(1) For financial definitions and ratios refer to the Glossary of Terms on page 68. (2) See Non-GAAP Financial Measures on page 33.

Contents 2005 Financial Report 1 Management’s Discussion and Analysis The 2005 Annual Report consists 36 Financial Results of the 2005 Annual Summary and 68 Glossary of Terms this 2005 Financial Report. Management’s Discussion and Analysis

2 1. Forward-Looking Statements 21 10. Risks and Risk Management 21 10.1 Operating Risks and Risk Management 3 2. Overview Industry Competitive Environment 3 3. Vision and Strategies Food Safety and Public Health Labour 5 4. Key Performance Indicators Employee Future Benefit Contributions Third-Party Service Providers 5 5. Financial Performance Real Estate 6 5.1 Results of Operations Seasonality Sales Leadership Development and Operating Income Employee Retention Interest Expense Utility and Fuel Prices Income Taxes Insurance Net Earnings Environmental, Health and Safety 11 5.2 Financial Condition Ethical Business Conduct Financial Ratios Legal, Taxation and Accounting Common Share Dividends Holding Company Structure Outstanding Share Capital 25 10.2 Financial Risks and Risk Management Financial Derivative Instruments 12 6. Liquidity and Capital Resources Foreign Currency Exchange Rate 12 6.1 Cash Flows Interest Rate Cash Flows from Operating Activities Common Share Market Price Cash Flows used in Investing Activities Counterparty Cash Flows used in Financing Activities Credit 13 6.2 Sources of Liquidity 14 6.3 Contractual Obligations 26 11. Related Party Transactions 15 6.4 Off-Balance Sheet Arrangements Guarantees 26 12. Critical Accounting Estimates Securitization of Credit Card Receivables 27 12.1 Valuation of Inventories Independent Funding Trust 27 12.2 Employee Future Benefits Financial Derivative Instruments 28 12.3 Goodwill 28 12.4 Income Taxes 16 7. Selected Consolidated Annual Information 29 12.5 Goods and Services Tax and Provincial Sales Taxes 18 8. Quarterly Results of Operations 18 8.1 Results by Quarter 29 13. Accounting Standards 19 8.2 Fourth Quarter Results 29 13.1 Accounting Standards Implemented in 2005 31 13.2 Future Accounting Standards 20 9. Disclosure Controls and Procedures 32 14. Outlook

33 15. Non-GAAP Financial Measures

35 16. Additional Information

2005 Financial Report Loblaw Companies Limited 1 Management’s Discussion and Analysis

The following Management’s Discussion and Analysis of current competitors, the ability to realize anticipated (“MD&A”) for Loblaw Companies Limited and its cost savings, including those resulting from restructuring subsidiaries (collectively, the “Company” or “Loblaw”) and other cost reduction initiatives, the ability to should be read in conjunction with the consolidated execute restructuring plans effectively, the Company’s financial statements and the accompanying notes on relationship with its employees, results of labour pages 37 to 65 of this Financial Report. The consolidated negotiations including the terms of future collective financial statements and the accompanying notes have bargaining agreements, changes to the regulatory been prepared in accordance with Canadian generally environment in which the Company operates now accepted accounting principles (“GAAP”) and are or in the future, changes in the Company’s tax liabilities, reported in Canadian dollars. As a result of implementing either through changes in tax laws or future assessments, Accounting Guideline 15, “Consolidation of Variable performance of third-party service providers, public Interest Entities”, (“AcG 15”) effective January 2, 2005, health events, the ability of the Company to attract these consolidated financial statements include the and retain key executives and supply and quality control accounts of Loblaw Companies Limited and its issues with vendors. The Company cautions that this subsidiaries and variable interest entities (“VIEs”) list of factors is not exhaustive. These factors and other that the Company is required to consolidate. A more risks and uncertainties are discussed in the Company’s comprehensive discussion regarding the implementation materials filed with the Canadian securities regulatory of AcG 15 is included in the section Accounting authorities from time to time, including in the Risks and Standards below. A glossary of terms used throughout Risk Management section of this MD&A. this Financial Report can be found on page 68. The The assumptions applied in making the forward-looking information in this MD&A is current to March 7, 2006, statements contained in this Annual Report, including unless otherwise noted. this MD&A include the following: economic conditions in 2006 do not materially change from those expected, 1. Forward-Looking Statements patterns of consumer spending are reasonably consistent This Annual Report, including this MD&A, contains with historical trends, no new significant competitors forward-looking statements which reflect management’s enter our market nor does any existing competitor expectations regarding the Company’s objectives, plans, significantly increase its presence, anticipated cost goals, strategies, future growth, results of operations, savings from restructuring activities are realized performance and business prospects and opportunities. as planned, continuing future restructuring activities These forward-looking statements include expected are effectively executed, there are no material work sales and earnings prospects for 2006. Forward-looking stoppages in 2006 and the performance of third-party statements are typically identified by words or phrases service providers is in accordance with expectations such as “anticipates”, “expects”, “believes”, “estimates”, in the upcoming year. “intends” and other similar expressions. Potential investors and other readers are urged to These forward-looking statements are not guarantees, consider these factors carefully in evaluating these but only predictions. Although the Company believes forward-looking statements and are cautioned not that these statements are based on information to place undue reliance on them. The forward-looking and assumptions which are current, reasonable and statements included in this Annual Report, including complete, these statements are necessarily subject to this MD&A are made only as of the filing date of this a number of factors that could cause actual results to Annual Report and the Company does not undertake vary significantly from the estimates, projections and to publicly update these forward-looking statements to intentions. Such differences may be caused by factors reflect new information, future events or otherwise. which include, but are not limited to, changes in In light of these risks, uncertainties and assumptions, the consumer spending and preferences, heightened forward-looking events contained in these forward-looking competition including new competitors and expansion statements may or may not occur. The Company cannot assure that projected results or events will be achieved.

2 2005 Financial Report Loblaw Companies Limited 2. Overview which continue to increase their offerings of products typically associated with traditional . Over Loblaw, a subsidiary of George Weston Limited, is the past several years, there has been an increase in Canada’s largest food distributor and a leading provider the number of retail outlets that traditionally exclusively of general merchandise, drugstore, and financial featured food, general merchandise or drugstore items, products and services. Through its various operating that now offer a selection of these items, resulting in what banners, it is committed to providing Canadians across is commonly referred to in the industry as “channel the country with a one-stop destination in meeting blurring”. This evolution of the retail landscape presents their food and everyday household needs. For over a number of issues for traditional grocers: the need 45 years, the Company has supplied the Canadian to re-position conventional supermarkets to either market with innovative products and services through expand or, conversely, better focus their offerings; the corporate, franchised and associated stores. Corporate reality of lower prices offered by discount models and owned store banners include Atlantic Superstore, the obvious need to reduce operating and labour costs Dominion (in Newfoundland and Labrador), Extra Foods, in order to maintain earnings in light of lower prices Loblaws, Maxi, Maxi & Cie, Provigo, The Real Canadian and increased competition. Superstore and Zehrs Markets and a number of wholesale outlets operating as Cash & Carry, Presto and 3. Vision and Strategies The Real Canadian Wholesale Club. The Company’s franchised and associated stores operate under the Loblaw’s vision has been, and continues to be, centred trade names Atlantic SaveEasy, Fortinos, Lucky Dollar on three main principles: growth, innovation and Foods, no frills, Shop Easy Foods, SuperValu, Valu-mart flexibility. While accepting prudent operating risks, Loblaw and Your Independent Grocer. The store network is seeks long term, stable growth supported by a strong supported by 26 Company owned and 2 third-party balance sheet, with the goal of providing sustainable warehouse facilities located across Canada. superior returns to its shareholders through a combination of common share price appreciation and dividends. The Company also offers a strong control label program, It encourages innovation based on the belief that including the President’s Choice and no name brands. providing consumers with new products and convenient In addition, the Company makes available to consumers services at competitive prices and exciting shopping President’s Choice Financial services and products, environments is critical to its success. Loblaw strives including the President’s Choice Financial MasterCard®, for flexibility in its operations in order to grow its and PC Financial auto, home, travel and pet insurance, market share across the country. PC Mobile phone service, as well as a loyalty program known as PC points. On a long term basis, Loblaw’s goal is to be known for: • offering the highest quality fresh foods; The Company competes in the retail industry in • a compelling value proposition and food assortment; Canada, which is a changing and competitive market. • leading in the development of unique, high quality Consumer needs drive industry changes, which are control label products and services; impacted by changing demographic and economic • a powerful and compelling general merchandise and trends such as changes in disposable income, increasing drugstore offering; ethnic diversity, nutritional awareness and time • delivering sustainable growth through distinct but availability. Over the past several years, consumers integrated approaches to the marketplace; and have demanded more choice, value and convenience. • providing a great place to work and grow. The Company competes with non-traditional competitors In support of its vision, the Company employs various as well as traditional supermarkets. Recent industry operating and financial strategies. These strategies changes have been characterized by the expansion of guide the Company over the long term and represent non-traditional competitors, such as mass merchandisers, a philosophy for the way in which it conducts warehouse clubs, limited assortment stores, discount its business. stores, convenience stores, drugstores and specialty stores,

2005 Financial Report Loblaw Companies Limited 3 Management’s Discussion and Analysis

The Company’s long term operating strategies are: • constantly striving to improve the Company’s • using the cash flow generated in the business to value proposition. invest in its future; The Company’s long term financial strategies are: • owning its real estate, where possible, to maximize • maintaining a strong balance sheet; flexibility for product and business opportunities in • minimizing the risks and costs of its operating and the future; financing activities; and • using a multi-format approach to maximize market • maintaining liquidity and access to capital markets. share over the longer term; • focusing on food but serving the consumer’s everyday The Company’s Board of Directors (the “Board”) household needs; and senior management meet annually to review • creating customer loyalty and enhancing price the strategic imperatives. These strategic imperatives, competitiveness through a superior control which generally span a three to five year time frame, label program; target specific issues in response to changes in • implementing and executing plans and programs consumer needs and the competitive retail landscape. flawlessly; and

The table below summarizes the Company’s strategic imperatives and the activities undertaken in 2005 to progress these imperatives.

Strategic Imperative Progress in 2005 Continue to focus on food • New products and programs were introduced in the produce, meat, bakery, seafood, deli and other areas • Centralized food merchandising teams were established to realize opportunities of scale and develop common practices •Increased number of President’s Choice and no name food offerings • Published first Healthy Insider’s Report featuring PC Blue Menu, PC Mini Chefs and additional PC Organics products Continue to drive general merchandise • Established a national and integrated organizational structure located at the Store Support and drugstore programs as a vital and Centre in Brampton, Ontario integral component of the business • Focused general merchandise offering on conveying qualities of product innovation, great value and differentiation in the marketplace • Increased number of products and services including the introduction of the PC Bath and Body line of products • Developed the Joe Fresh Style apparel for adults which was introduced in early 2006 Leverage the equity of the President’s •Launched the PC Mobile line of prepaid cellular phone services and related accessories Choice brand across all product lines • Continued to grow the President’s Choice Financial MasterCard® and PC Financial while ensuring consistent quality insurance programs is maintained • Launch of the first PC Home Insider’s Report Intensify leadership programs with • Store Managers’ Council completed first full year of operation a focus on store operations, increasing • Conducted off-site leadership sessions for store personnel the frequency of sessions and taking • Developed common approach to leadership coaching, program execution and business a more interactive, collaborative development at the store level approach to training Execute on imperatives • Continued development of four distinct store formats: superstores, hard discount stores, as a cost effective and fully conventional stores and warehouse clubs integrated operation • Continued discussions with organized labour to explore competitive opportunities • Work continued on the conversion to one national systems platform across a number of functions • Simplified distribution network by closing several smaller facilities and transferring various functions to larger, more cost-effective centres • Focused on simplification of business operations including the examination of the flow of goods from vendors to store shelves

4 2005 Financial Report Loblaw Companies Limited Management has identified specific critical success factors 5. Financial Performance which are key enablers of the long term strategies. These Basic net earnings per common share for 2005 were critical success factors involve systems and technology, $2.72, a 23% reduction when compared to $3.53 logistics, food safety, working capital management last year. Basic net earnings per common share were and labour partnerships. Targets have been set across negatively impacted in 2005 by the following: the Company that will enable management to assess • 22 cents per common share for the net effect progress made on each imperative as well as the of stock-based compensation and the associated effectiveness of implementation. The Company believes equity forwards; that if it successfully implements and executes its • 20 cents per common share related to restructuring various strategic imperatives in support of its long term and other charges; operating and financial strategies, it will be well • 10 cents per common share related to the estimate positioned to pursue its vision of providing sustainable of Goods and Services Tax (“GST”) and provincial superior returns to its shareholders. sales taxes (“PST”) charges; • 7 cents per common share related to the estimated 4. Key Performance Indicators impact of direct costs associated with supply chain The Company continuously reviews and monitors its disruptions; activities and performance indicators, which it believes • 1 cent per common share related to the adjustment are important to measuring the success of the to future income tax balances due to the changes in implementation of its operating and financial strategies. statutory income tax rates in certain provinces; and Some of the Company’s key performance indicators • 3 cents per common share related to the consolidation are set out below: of variable interest entities.

Key Performance Indicators After adjusting for the above noted items, adjusted basic net earnings per common share(1) were $3.35 2005 2004 for the year. These results compare to adjusted basic (52 weeks) (52 weeks) net earnings per common share(1) of $3.48 in 2004, Sales growth(2) 6.1% 3.9% which were adjusted for the successful resolution Sales growth excluding of certain income tax matters from a previous year of impact of VIEs(1) 4.6% 3.9% $14 million. The net effect of stock-based compensation Basic net earnings per and the associated equity forwards did not have an common share growth (22.9)% 15.0% impact on basic net earnings per common share in 2004. Adjusted basic net earnings per common share(1) growth (3.7)% 12.3% Results for 2005 were adversely affected by the Net debt (1) to equity ratio .66:1 .71:1 short term costs associated with one of the largest Return on average transformations in the Company’s history. The need for shareholders’ equity 13.2% 19.2% this transformative process was driven by the Company’s assessment of a fast-changing retail environment (1) See Non-GAAP Financial Measures on page 33. marked by increased consumer choice, low-cost (2) Sales growth in 2004 calculated on a 53 week year base in 2003. The extra week in 2003 had a negative impact of approximately 2% global retailers, and the addition of an increasingly on the 2004 sales growth shown in the table above. unsustainable amount of industry square footage.

Other performance indicators include, but are not Based on this assessment, the Company developed a limited to: same-store sales growth, operating and comprehensive strategy designed to fortify its competitive administrative cost management, development of new position and to maintain its leadership role in meeting control label products and market share. the food and everyday household needs of Canadian consumers. In pursuit of this strategy, the Company

(1) See Non-GAAP Financial Measures on page 33. 2005 Financial Report Loblaw Companies Limited 5 Management’s Discussion and Analysis

implemented a number of transformative changes to interest entities, also contributed to the reduction its organization during 2005. in basic net earnings per common share by 22 cents, 1 cent and 3 cents per common share, respectively. These changes included the restructuring of its supply chain network and the reorganizations involving its 5.1 Results of Operations merchandising, procurement and operations groups, the Sales and Sales Growth Excluding Impact of VIEs(1) establishment of a new national head office and Store Support Centre in Brampton, Ontario, which opened in ($ millions except 2005 2004 the third quarter of 2005, and the relocation of general where otherwise indicated) (52 weeks) (52 weeks) merchandise operations from Calgary, Alberta to the Total sale s $ 27,801 $ 26,209 new office. A charge of 20 cents per common share was Less: Sales attributable to recorded in 2005 consisting of employee termination the consolidation of VIEs pursuant to AcG 15 378 benefits resulting from planned involuntary terminations, (1) site closing costs and fixed asset impairment and Sales excluding impact of VIEs $ 27,423 $ 26,209 accelerated depreciation charges associated with Total sales growth(2) 6.1% 3.9% these activities. Less: Positive impact on sales growth attributable to the The Company encountered challenges during the consolidation of VIEs execution of planned changes to its systems, supply pursuant to AcG 15 1.5% chain and general merchandise areas including certain Sales growth excluding impact of VIEs(1) 4.6% 3.9% supply chain systems conversions which were initiated as part of the creation of a national information (1) See Non-GAAP Financial Measures on page 33. technology platform and the startup of a new third-party (2) Sales growth in 2004 calculated on a 53 week year base in 2003. owned and operated general merchandise warehouse and The extra week in 2003 had a negative impact of approximately 2% on the 2004 sales growth shown in the table above. distribution centre for eastern Canada. These challenges disrupted the flow of inventory to the Company’s stores Sales Full year sales in 2005 increased 6.1% to and caused the Company to incur additional operating $27.8 billion from $26.2 billion last year, including 1.5% costs. Additional incremental direct costs incurred in the or $378 million in sales relating to the consolidation of handling, storage and movement of inventory resulting certain independent franchisees as required by AcG 15. from these disruptions amounted to approximately Excluding the impact of the VIEs, 2005 sales increased 7 cents per common share for the year. 4.6% or $1.2 billion over last year.

Also in 2005, a charge was recorded relating to an The following factors further explain the change in sales audit and proposed assessment by the Canada Revenue over the prior year: Agency relative to GST on certain products sold during • as described earlier, certain initiatives resulted in prior fiscal periods on which GST was not appropriately supply chain disruptions and a drop in service levels charged and remitted. In light of this proposed and in-stock positions causing an estimated reduction assessment, the Company assessed and estimated the in expected sales growth of approximately 0.5% to potential liabilities for GST and PST in other areas of 0.7% versus last year; its operations. Accordingly, a charge of 10 cents per • retail sales growth in general merchandise and common share was recorded to reflect the best estimate drugstore categories continued to exceed that of of such potential tax liabilities of which management food in all regions except in ; is currently aware. general merchandise and drugstore sales in western Canada were most profoundly impacted by the Further charges in 2005 related to the net effect of supply chain disruptions; stock-based compensation and the associated equity • The Real Canadian Superstore program was forwards, the adjustment to future income tax balances positively received in Ontario and has enjoyed due to the changes in statutory income tax rates significant sales growth; in certain provinces and to the consolidation of variable • strong gas bar sales were partially offset by a decline in tobacco sales; 6 2005 Financial Report Loblaw Companies Limited • same-store sales growth of approximately 0.2%; 2,000 new control label products in 2005, including • national food price inflation as measured by 1,600 new general merchandise products. The “The Consumer Price Index for Food Purchased from Company’s control label program, which includes Stores” (“CPI”) was approximately 2% for the year, with President’s Choice, PC, President’s Choice Organics, variances by region; the Company’s calculation of PC Blue Menu, PC Mini Chefs, no name, Club Pack, food price inflation, which considers Company-specific GREEN, EXACT, Teddy’s Choice and Life@Home, product mix and pricing strategy, was reasonably provides additional sales growth potential. consistent with that of CPI; Loblaw expects that the following initiatives, coupled • an increase in net retail square footage of 2.8 million with continued investment in pricing, promotions and square feet or 6.1% due to the opening of 69 new advertising where appropriate, will generate continued corporate and franchise stores and the closure sales growth over the next few years: of 57 stores including stores which have undergone • capital investment in its store network including conversions and major expansions; the planned opening, expansion or renovation • sales per corporate store increased to $32 million of approximately 123 corporate and franchise stores in 2005 from $31 million in 2004 reflecting the across Canada in 2006; introduction of larger stores which are expected to • additional emphasis on food offerings of great quality become ultimately more productive; and and value; • sales per average square foot of corporate stores of • expansion of general merchandise offerings, including $579 in 2005 decreased from $592 in 2004 as a the launch of Joe Fresh Style apparel for adults in result of increases in net retail square footage which early 2006, and continued improvement in the outpaced the increase in sales. execution of its general merchandise and drugstore Sales of control label products for 2005 amounted programs; and to $5.9 billion compared to $5.6 billion in 2004. • continued focus on control label products including Control label penetration, which is measured as control the development of new products in strategic label retail sales as a percentage of total retail sales, categories, increased marketing and shortened was 22.4% for 2005, and approximately equal to that time to market. of 2004. The Company introduced approximately

Sales and Sales Growth Same-Store Sales Growth ($ millions)

$28,000 20% 6.0%

21,000 15 4.5

14,000 10 3.0

7, 0 0 0 5 1.5

0 0 0 2001 2002 2003(2) 2004 2005 2001 2002 2003(1) 2004 2005

Sales Same-Store Sales Growth Sales Growth (1) 2003 was a 53 week year. Sales Growth Excluding Impact of VIEs(1) (1) See Non-GAAP Financial Measures on page 33. (2) 2003 was a 53 week year.

2005 Financial Report Loblaw Companies Limited 7 Management’s Discussion and Analysis

Operating Income, Adjusted Operating Income, Adjusted EBITDA and Margins(1) This plan, which is anticipated to be fully implemented by the end of 2007 or early 2008, is expected ($ millions except 2005 2004 to reduce future operating costs, provide a smoother where otherwise indicated) (52 weeks) (52 weeks) Change flow of products and better service levels to stores Operating income $ 1,401 $ 1,652 (15.2)% and further enable the Company to achieve its targeted Adjusted operating operating efficiencies. The plan involves the closure of income(1) $ 1,600 $ 1,652 (3.1)% six distribution centres and the relocation of certain Operating margin 5.0% 6.3% activities to new distribution centres. Costs accrued thus Adjusted operating far relate primarily to employee termination benefits margin(1) 5.8% 6.3% resulting from planned involuntary terminations. Further Adjusted EBITDA(1) $ 2,132 $ 2,125 0.3% costs related to fixed asset impairment and accelerated Adjusted EBITDA margin(1) 7.8% 8.1% depreciation and site closure costs as well as additional employee costs will be recognized as appropriate

(1) See Non-GAAP Financial Measures on page 33. criteria are met. Total costs are expected to approximate $90 million of which $62 million was recognized Operating Income Operating income for 2005 decreased in 2005. $251 million, or 15.2%, to $1.4 billion. Operating margin declined to 5.0% in 2005 from 6.3% in 2004. In addition to the restructuring of its supply Adjusted EBITDA(1) increased marginally in 2005. chain network, the Company also reorganized its Adjusted EBITDA margin(1) was 7.8% in 2005 compared merchandising, procurement and operations groups, to 8.1% in 2004. In 2005, operating income was established a new national head office and Store adversely impacted by the factors described below. Support Centre in Brampton, Ontario, which opened in the third quarter of 2005, and relocated its general During the first quarter of 2005, after completion of merchandise operations from Calgary, Alberta to the a detailed assessment of its supply chain network, new office. Of the total estimated $25 million cost management of the Company approved a comprehensive associated with these initiatives, $24 million was plan to restructure its supply chain operations nationally. recognized in 2005 resulting in total restructuring and other charges of $86 million in 2005.

Operating Income and Margins Analysis of Adjusted EBITDA and Margin(1) ($ millions) ($ millions)

$2,000 12% $2,200 12%

1,500 9 1,650 9

1,000 6 1,100 6

500 3 550 3

0 0 0 0 2001 2002 2003(2) 2004 2005 2001 2002 2003(2) 2004 2005 Operating Margin Net Earnings before Minority Interest Adjusted Operating Margin(1) Goodwill Charges Adjusted EBITDA Margin(1) Income Taxes Operating Income Interest Expense Adjusted Operating Income(1) Depreciation and Amortization (1) See Non-GAAP Financial Measures on page 33. Impact of Adjusted Items (2) 2003 was a 53 week year. Adjusted EBITDA Margin(1) (1) See Non-GAAP Financial Measures on page 33. (2) 2003 was a 53 week year.

8 2005 Financial Report Loblaw Companies Limited (1) See Non-GAAP Financial Measures on page 33. Higher direct and indirect operating costs resulting from Costs Recognized Total the supply chain disruptions were significant during the in 2005 Expected last two quarters of 2005. While it was possible to ($ millions) (52 weeks) Costs quantify the direct costs at approximately $30 million Supply chain network $ 62 $ 90 for the year, the indirect cost of lost sales, poor service Office move and reorganization levels and resultant higher operating costs was difficult of the operation support functions 24 25 to quantify.

Total restructuring and other charges $ 86 $ 115 During the third quarter of 2005, the Company also recorded a charge relating to an audit and proposed In 2005, operations were also disrupted by certain assessment by the Canada Revenue Agency relating systems conversions and the startup of a new third-party to GST on certain products sold between 2000 and owned and operated general merchandise warehouse 2002 on which GST was not appropriately charged and and distribution centre serving eastern Canada. remitted. In light of this proposed assessment, the Company assessed and estimated the potential liabilities As part of the plan to consolidate the Company’s for GST and PST in other areas of its operations for supply chain operations nationally and to implement a various periods up to the end of 2004. Accordingly, a national information technology platform, a number of charge of $40 million was recorded in operating income warehouse systems conversions in western Canada to reflect management’s best estimate of such potential commenced late in the second quarter of 2005 and tax liabilities of which management is currently aware. were scheduled to be completed by year end 2005. Approximately $15 million of this amount was settled Implementation challenges arising from these initiatives during the fourth quarter of 2005. The ultimate remaining were encountered, particularly during the conversion amount paid will depend on the outcome of audits of the Calgary, Alberta general merchandise distribution performed by, or settlements reached with the various tax centre. Service levels, a measure of distribution authorities and therefore may differ from this estimate. centre operating efficiency, fell below normal running Management will continue to assess the remaining accrual rates, resulting in recurring out-of-stock positions at as progress towards resolution with the various tax retail. This resulted in lost sales and the associated authorities is made and will adjust the remaining accrual operating income. Given the challenges encountered accordingly. An internal review of the procedures and in the Calgary general merchandise distribution centre, controls surrounding the process of charging and all other planned system conversions for 2005 were remitting these taxes has been substantially completed delayed and resumed in early 2006. and recommendations are in the process of being In Ontario, the general merchandise warehouse and implemented to avoid the recurrence of similar charges distribution activities were transitioned to a new facility subsequent to the periods currently accounted for. owned and operated by a third party. Complexities were An incremental charge of $43 million over last year was experienced during the start-up phase and as a result, also recorded in operating income in 2005 for the net service levels were below expectations in the second half effect of stock-based compensation and the associated of the year. This resulted in some out-of-stock positions equity forwards. in Ontario and a delay in the transition of volume into the third-party facility from existing Company distribution After adjusting for the above-noted items, adjusted (1) centres, which in turn, placed additional pressure on operating income was $1.6 billion in 2005 compared (1) existing Company distribution centres. Productivity to $1.7 billion in 2004. Adjusted operating margin declined in certain Company distribution centres during was 5.8% in 2005 compared to 6.3% in 2004. 2005 as a result of the announced restructuring.

(1) See Non-GAAP Financial Measures on page 33. 2005 Financial Report Loblaw Companies Limited 9 Management’s Discussion and Analysis

Inventory shrink in the general merchandise categories In 2006, interest expense is expected to be relatively was higher than normal throughout 2005 and showed consistent with that of 2005. some progress back to more normal levels in the Interest on long term debt in 2005 was consistent with fourth quarter. Improved buying synergies and product last year’s level, at $290 million. The 2005 weighted mix offset this increase in shrink, resulting in gross average fixed interest rate on long term debt (excluding margin in 2005 that was approximately equal to that capital lease obligations) was 6.7% (2004 – 6.8%) and of 2004. Softening sales from product supply issues the weighted average term to maturity was 17 years and deliberate delays in program activity in 2005 (2004 – 17 years). resulted in lost leverage on the fixed components of operating and administrative expenses. Interest on financial derivative instruments includes the net positive effect of the Company’s interest rate swaps, The Company expects to see improvement in adjusted cross currency basis swaps and equity forwards, and operating income(1) on a year-over-year basis during the amounted to income of $6 million in 2005 (2004 – second half of 2006. The emphasis in the early part $30 million). The decrease in net interest income was of 2006 will be on improving service levels, particularly due mainly to the maturity of interest rate swaps during in the general merchandise and drugstore areas, and the year and an increase in United States short term ensuring that product is available at the store level to interest rates. support merchandising programs. The Company expects some lowering of prices in certain formats to encourage Net short term interest income of $11 million was realized more customer traffic and build sales. in 2005 (2004 – nil). This increase in income resulted primarily from higher interest rates on United States Interest Expense Interest expense consists primarily of dollar denominated cash, cash equivalents and short interest on short and long term debt, the amortization term investments partially offset by an increase in of deferred financing costs net of interest on financial Canadian short term interest rates. derivative instruments, interest income earned on short term investments and interest capitalized to fixed assets. During 2005, $21 million (2004 – $21 million) of In 2005, total interest expense increased $13 million, interest incurred on debt related to real estate properties or 5.4%, to $252 million from $239 million in 2004. under development was capitalized to fixed assets.

Net Debt(1) to Equity and Interest Coverage Total Assets and Return on Average Total Assets(1) ($ millions)

$14,000 16% .8 10.0

10,500 12 .6 7.5

8 .4 5.0 7, 0 0 0

.2 2.5 3,500 4 Interest Coverage – Times – Coverage Interest Net Debt to Equity to Debt Net 0 0 0 0 2001 2002 2003 2004 2005 2001 2002 2003(2) 2004 2005

Net Debt (1) to Equity Total Assets Interest Coverage Return on Average Total Assets (1) (1) See Non-GAAP Financial Measures on page 33. (1) See Non-GAAP Financial Measures on page 33. (2) 2003 was a 53 week year.

10 2005 Financial Report Loblaw Companies Limited (1) See Non-GAAP Financial Measures on page 33. Analysis of Long Term Financing Costs certain predetermined circumstances and are secured through a general security agreement made by the ($ millions except 2005 2004 independent franchisees in favour of the independent where otherwise indicated) (52 weeks) (52 weeks) funding trust. Interest is charged on a floating rate basis Total long term debt at and prepayment of the loans may be made without year end (including portion penalty. The independent funding trust within the due within one year) $ 4,355 $ 4,151 structure finances its activities through the issuance of Interest on long term debt $ 290 $ 290 short term asset-backed notes to third-party investors. Weighted average fixed interest rate on long term debt (excluding As disclosed in Note 19 to the consolidated financial capital lease obligations) 6.7% 6.8% statements for the year ended December 31, 2005, a standby letter of credit has been provided by a major Canadian bank for the benefit of the independent Income Taxes The effective income tax rate in 2005 funding trust equal to approximately 10% of the total increased to 34.8% from 31.5% in 2004, mainly principal amount of the loans outstanding at any point as a result of the change in the income tax impact in time. The Company has agreed to reimburse the related to stock-based compensation and the associated issuing bank for any amount drawn on the standby letter equity forwards and the successful resolution in 2004 of credit. In the event of a default by an independent of certain income tax matters from a previous year. franchisee, the independent funding trust may assign The effective income tax rate for 2006 is expected to the loan to the Company and draw upon the standby be approximately 33%, however, this rate may change letter of credit. No amount has ever been drawn on with variances in the proportion of taxable income the standby letter of credit. across different tax jurisdictions or if there is any change Cash flows from operating activities cover a large in tax legislation. portion of the Company’s funding requirements and Net Earnings In 2005, net earnings decreased in 2005, exceeded the capital investment program $222 million, or 22.9%, to $746 million from of $1.2 billion. In 2005, funding requirements resulted $968 million in 2004 and basic net earnings per primarily from the capital investment program and common share decreased 81 cents, or 22.9%, dividends paid on the Company’s common shares. to $2.72 from $3.53 in 2004 due to the factors In 2005, shareholders’ equity increased $472 million, described in the preceding sections. or 8.7%, to $5.9 billion. The 2006 net debt to equity 5.2 Financial Condition ratio is expected to improve slightly as retained Financial Ratios The net debt(1) to equity ratio continued earnings growth is expected to exceed debt financing to be within the Company’s internal guideline of less requirements. The interest coverage ratio declined to than 1:1. The 2005 net debt(1) to equity ratio was .66:1 5.6 times in 2005 compared to 6.9 times in 2004, compared to the 2004 ratio of .71:1. as a result of the decline in operating income as outlined previously. Pursuant to the requirements of AcG 15, the consolidated balance sheet as at December 31, 2005 includes At year end, the working capital position improved over $126 million of loans payable of VIEs consolidated by the prior year. The 2005 return on average total assets(1) the Company, $23 million of which is due within one was 11.2% compared to 14.2% in 2004. The 2005 year. The loans payable represent financing obtained return on average shareholders’ equity was 13.2% by eligible independent franchisees through a structure compared to the 2004 return of 19.2%. Both 2005 involving independent trusts to facilitate the purchase returns were negatively impacted by the incremental of the majority of their inventory and fixed assets, costs and charges incurred in 2005 as outlined consisting mainly of fixturing and equipment. These previously. The five year average return on shareholders’ loans payable, which have an average term to maturity equity was 17.3% (2004 – 18.2%). of 7 years, are due and payable on demand under

(1) See Non-GAAP Financial Measures on page 33. 2005 Financial Report Loblaw Companies Limited 11 Management’s Discussion and Analysis

Common Share Dividends The Company’s dividend policy is long term loans receivable as described in the Related to maintain a dividend payment equal to approximately Party Transactions section of this MD&A. In addition, 20% to 25% of the prior year’s adjusted basic net the shortening term to maturity profile of the Company’s earnings per common share, giving consideration to the short term investments portfolio resulted in a shift from year end cash position, future cash flow requirements short term investments to cash and cash equivalents. and investment opportunities. During 2005, the Board Capital investment amounted to $1.2 billion (2004 – declared quarterly dividends of 21 cents per common $1.3 billion), reflecting a continuing commitment share. The annualized dividend per common share of to maintain and renew the asset base and invest for 84 cents is equal to 24.1% of the 2004 adjusted basic growth. Approximately 82% (2004 – 83%) of the net earnings per common share(1), which is consistent capital investment was for new stores, renovations with the Company’s dividend policy. Subsequent to or expansions. The continued capital investment activity year end, the Board declared a quarterly dividend of benefited all regions in varying degrees and strengthened 21 cents per common share, payable April 1, 2006. the existing store base. Some of the new, larger stores Outstanding Share Capital The Company’s outstanding replaced older, smaller, less efficient stores that did not share capital is comprised of common shares. An offer the broad range of products and services demanded unlimited number of common shares is authorized and by today’s consumer. The remaining 18% (2004 – 17%) 274,054,814 common shares were outstanding at year of the capital investment was for the warehouse and end. Further information on the Company’s outstanding distribution network, information systems and other share capital is provided in Note 16 to the consolidated infrastructure required to support store growth. financial statements. The 2005 corporate and franchised store capital investment program, which includes the impact of store 6. Liquidity and Capital Resources openings and closures, resulted in an increase in net 6.1 Cash Flows retail square footage of 6.1% over 2004. During 2005, Major Cash Flow Components 69 (2004 – 86) new corporate and franchised stores were opened and 77 (2004 – 82) underwent 2005 2004 renovation or minor expansion. The 69 new stores, net ($ millions) (52 weeks) (52 weeks) Change

Cash flows from Cash Flows from Operating Activities (used in): and Capital Investment ($ millions) Operating activities $ 1,489 $ 1,443 $ 46 Investing activities $ (903) $ (1,177) $ 274 $1,500 Financing activities $ (208) $ (290) $ 82 1,125

Cash Flows from Operating Activities 2005 cash flows 750 from operating activities increased to $1.5 billion from

$1.4 billion in 2004. The 2006 cash flows from 375 operating activities are expected to increase at a rate consistent with net earnings growth and are expected 0 2001 2002 2003(1) 2004 2005 to fund a large portion of the anticipated 2006 Cash Flows from Operating Activities funding requirements, including planned capital Capital Investment investment activity. (1) 2003 was a 53 week year.

Cash Flows used in Investing Activities 2005 cash flows used in investing activities were $903 million compared to $1.2 billion in 2004. During 2005, proceeds were received from the sale of a portfolio of third-party

12 2005 Financial Report Loblaw Companies Limited (1) See Non-GAAP Financial Measures on page 33. of 57 (2004 – 71) store closures, added 2.8 million was filed. Net change in VIE long term debt issued square feet of retail space (2004 – 3.4 million). The and retired during 2005 was not material. In 2006, 2005 average corporate store size increased 4.7% to the $125 million of 8.70% Provigo Inc. Debenture 56,100 square feet (2004 – 53,600) and the average will mature. franchised store size increased 4.2% to 27,100 square The Company intends to renew its Normal Course Issuer feet (2004 – 26,000). Bid (“NCIB”) to purchase on the Toronto Stock Exchange Capital investment is estimated at $1 billion for 2006. or enter into equity forwards to purchase up to 5% of At year end, the Company had committed approximately its common shares outstanding. During 2005, the $264 million (2004 – $354 million) with respect to Company purchased for cancellation 226,100 (2004 – capital investment projects and the purchase of real 576,100) of its common shares for $16 million (2004 – property. In 2006, the Company plans to open, expand or $35 million), pursuant to its NCIB. renovate more than 123 corporate and franchised stores 6.2 Sources of Liquidity throughout Canada in a geographic investment pattern The Company can obtain its short term financing similar to that of last year. This is expected to result in through a combination of cash generated from operating a net increase of approximately 1.8 million square feet, activities, cash, cash equivalents, short term investments, which should generate additional sales growth. bank indebtedness and its commercial paper program. The Company also generated $109 million (2004 – The Company’s cash, cash equivalents and short term $110 million) from fixed asset sales. investments, as well as $845 million in uncommitted operating lines of credit extended by several banks, Capital Investment and Store Activity support its $1.2 billion commercial paper program. The Company’s commercial paper borrowings generally 2005 2004 (52 weeks) (52 weeks) Change mature less than three months from the date of issuance although the terms can be up to 364 days. Capital investment ($ millions) $ 1,156 $ 1,258 Securitization of credit card receivables provides Retail square President’s Choice Bank (“PC Bank”), a wholly owned footage (in millions) 48.5 45.7 6.1% subsidiary of the Company, with an additional source of Average store size (sq. ft.) funds for the operation of its business. Under PC Bank’s Corporate 56,100 53,600 4.7% securitization program, a portion of the total interest Franchised 27,100 26,000 4.2% in the credit card receivables is sold to an independent trust. PC Bank securitized $225 million of credit card Cash Flows used in Financing Activities Cash flows used in receivables during 2005 (2004 – $227 million). financing activities decreased to $208 million in 2005 In 2006, PC Bank finalized the restructuring of its compared to $290 million in 2004 mainly due to the securitization program which was undertaken in part relative change in commercial paper when compared to to accommodate growth in the credit card program. the same period last year. Information on PC Bank’s credit card receivables and securitization is provided in Notes 8 and 19 to the During the first quarter of 2005, Loblaw issued consolidated financial statements and in the Off-Balance $300 million of 5.90% Medium Term Notes (“MTN”) Sheet Arrangements section of this MD&A. due 2036, under its 2003 Base Shelf Prospectus, to refinance the $100 million of 6.35% Provigo Inc. The Company obtains its long term financing through Debenture that matured in the fourth quarter of 2004 its MTN program. The Company plans to refinance and the $200 million of 6.95% MTN that matured existing long term debt as it matures. in the first quarter of 2005. During the second quarter In the normal course of business, the Company of 2005, the Company’s 2003 Base Shelf Prospectus enters into certain arrangements, such as providing expired and a new base shelf prospectus allowing comfort letters to third-party lenders in connection the issue of up to $1 billion of aggregate MTN

2005 Financial Report Loblaw Companies Limited 13 Management’s Discussion and Analysis

with financing activities of certain franchisees, with The Company’s credit ratings are outlined in the no recourse liability to the Company. In addition, the table below: Company establishes standby letters of credit used Credit Ratings (Canadian Standards) in connection with certain obligations related to the financing program for its franchisees, securitization of Dominion Bond Standard Rating Service & Poor’s PC Bank’s credit card receivables, real estate transactions and benefit programs. At year end, the aggregate Commercial paper R-1 (low) A-1 (mid) gross potential liability related to the Company’s standby Medium term notes A (high) A letters of credit was approximately $276 million Other notes and debentures A (high) A (2004 – $264 million) against which the Company had $316 million (2004 – $311 million) in credit facilities The rating organizations listed above base their credit available to draw on. ratings on quantitative and qualitative considerations. In January 2006, Dominion Bond Rating Service The Company has the following sources from which and Standard & Poor’s changed their outlook on the it can fund its 2006 cash requirements: cash flows trend of the Company’s long term debt from “stable” generated from operating activities, cash, cash to “negative”. equivalents, short term investments, commercial paper program, MTN program and additional credit card These credit ratings are intended to give an indication receivable securitizations from future growth in the of the risk that the Company will not fulfill its obligations PC Bank credit card operations. in a timely manner. 6.3 Contractual Obligations In 2006, the Company anticipates no difficulty in obtaining external financing in view of its current credit The following illustrates certain of the Company’s ratings, its past experience in the capital markets and significant contractual obligations and discusses other general market conditions. obligations as at December 31, 2005:

Summary of Contractual Obligations Payments due by year ($ millions) 2006 2007 2008 2009 2010 Thereafter Total

Long term debt $ 161 $ 24 $ 406 $ 140 $ 314 $ 3,310 $ 4,355 Operating leases(1) 192 184 166 146 126 823 1,637 Contracts for purchases of real property and capital investment projects(2) 255 9 264 Purchase obligations(3) 693 811 758 717 656 1,320 4,955

Total contractual obligations $ 1,301 $ 1,019 $ 1,339 $ 1,003 $ 1,096 $ 5,453 $ 11,211

(1) Represents the minimum or base rents payable. Amounts are not offset by any expected sub-lease income. (2) These obligations include agreements for the purchase of real property. These agreements may contain conditions that may or may not be satisfied. If the conditions are not satisfied, it is possible the Company will no longer have the obligation to proceed with the transaction. These obligations also include commitments with respect to capital investment projects, such as the construction, expansion and renovation of buildings. (3) These include material contractual obligations to purchase goods or services where the contract prescribes fixed or minimum volumes to be purchased or payments to be made within a fixed period of time for a set or variable price. While estimates of anticipated financial commitments were made for the purpose of this disclosure, the amount of actual payments may vary.

The purchase obligations presented in the above table do liability to the Company. Also excluded are purchase not include purchase orders issued in the ordinary course obligations related to commodities or commodity-like of business for goods which are meant for resale, nor goods for which a market for resale exists. The Company do they include any contracts which may be terminated believes such excluded contracts do not have a material on relatively short notice with insignificant cost or impact on its liquidity.

14 2005 Financial Report Loblaw Companies Limited At year end, the Company had other long term liabilities Securitization of Credit Card Receivables The Company, which included accrued benefit plan liability, future through its wholly owned subsidiary PC Bank, income taxes liability and stock-based compensation securitizes credit card receivables through an liability. These long term liabilities have not been independent trust administered by a major Canadian included in the table above for the following reasons: bank. In these securitizations, PC Bank sells a portion • future payments of accrued benefit plan liability, of its credit card receivables to the trust in exchange for principally post-retirement benefits, depend on when cash. The trust funds these purchases by issuing debt and if retirees submit claims; securities in the form of asset-backed commercial paper • future payments of income taxes depend on the levels to third-party investors. The securitizations are accounted of taxable earnings; for as asset sales only when PC Bank transfers control • future payments of the share appreciation value on of the transferred assets and receives consideration employee stock options depend on whether employees other than beneficial interests in the transferred assets. exercise their stock options, the market price of All transactions between the trust and PC Bank have the Company’s common shares on the exercise date been, and are expected to continue to be, accounted and the manner in which they exercise those stock for as sales as contemplated by Canadian GAAP, options; and specifically Accounting Guideline (“AcG”) 12, “Transfers • future payments of restricted share units depend on of Receivables”. As PC Bank does not control or market price of the Company’s common shares. exercise any measure of influence over the trust, the financial results of the trust have not been included 6.4 Off-Balance Sheet Arrangements in the Company’s consolidated financial statements. In the normal course of business, the Company enters into the following off-balance sheet arrangements: When the Company sells credit card receivables to the • standby letters of credit used in connection with trust, it no longer has access to the receivables but certain obligations mainly related to real estate continues to maintain credit card customer account transactions and benefit programs, the aggregate relationships and servicing obligations. The Company gross potential liability of which is approximately does not receive a servicing fee from the trust for $143 million (2004 – $104 million); its servicing obligations. When a sale occurs, PC Bank •guarantees; retains a subordinated interest consisting of rights • the securitization of a portion of PC Bank’s credit card to future cash flows after obligations to the investors receivables through independent trusts; in the trust have been met which is considered to • a standby letter of credit to an independent funding be a retained interest. The trust’s recourse to PC Bank’s trust which provides loans to the Company’s assets is limited to PC Bank’s retained interests and franchisees for their purchase of inventory and is further supported through a standby letter of credit fixed assets; and provided by a major Canadian bank for 9% (2004 – 15%) • financial derivative instruments in the form of interest of the securitized amount. This standby letter of credit rate swaps. could be drawn upon in the event of a major decline in the income flow from or in the value of the securitized Guarantees The Company has entered into various credit card receivables. The Company has agreed guarantee agreements including standby letters of credit to reimburse the issuing bank for any amount drawn in relation to the securitization of PC Bank’s credit card on the standby letter of credit. The carrying value of the receivables and in relation to third-party financing made retained interests is periodically reviewed and when a available to the Company’s franchisees and obligations decline in value is identified that is other than temporary, to indemnify third parties in connection with leases, the carrying value is written down to fair value. business dispositions and other transactions in the normal course of the Company’s business. For a detailed description of the Company’s guarantees, see Note 19 to the consolidated financial statements.

2005 Financial Report Loblaw Companies Limited 15 Management’s Discussion and Analysis

As at December 31, 2005, the total amount of Company has agreed to provide credit enhancement in securitized credit card receivables outstanding which the form of a standby letter of credit for the benefit of PC Bank continues to service was $1 billion (2004 – the independent funding trust for approximately 10% of $785 million) and the associated retained interests the principal amount of the loans outstanding at any amounted to $5 million (2004 – $12 million). The point in time, or $42 million (2004 – $42 million) as standby letter of credit supporting these securitized of December 31, 2005. This credit enhancement allows receivables amounted to approximately $91 million the independent funding trust to provide favourable (2004 – $118 million). During 2005, PC Bank received financing terms to the Company’s franchisees. In the income of $106 million (2004 – $83 million) in event that a franchisee defaults on its loan and the securitization revenue from the independent trust Company has not, within a specified time period, relating to the securitized credit card receivables. assumed the loan, or the default is not otherwise In the absence of securitization, the Company would remedied, the independent funding trust may assign be required to raise alternative financing by issuing debt the loan to the Company and draw upon this standby or equity instruments. Further disclosure regarding letter of credit. The Company has agreed to reimburse this arrangement is provided in Notes 8 and 19 to the issuing bank for any amount drawn on the standby the consolidated financial statements. letter of credit. No amount has ever been drawn on the standby letter of credit. The Company is confident In October 2005, Eagle Credit Card Trust (“Eagle”), it would be able to fully recover from the franchisee any an independent trust, was established for the purpose of amounts it had reimbursed to the issuing bank. Neither issuing notes backed by credit card receivables originated the independent funding trust nor the Company can and serviced by PC Bank. Subsequent to year end, voluntarily terminate the agreement prior to December Eagle issued $500 million, five year notes at a weighted 2009, and only upon six months’ prior notice following average rate of 4.5%, due 2011, to finance the purchase that date. Automatic termination of the agreement of credit card receivables, previously securitized by can only occur if specific, pre-determined events occur PC Bank, from an independent trust. PC Bank will and are not remedied within the time periods required. continue to service the credit card receivables on behalf If the arrangement is terminated, the franchisees of Eagle but will not receive any fee for its servicing would be required to replace the loans provided by obligations and has a retained interest in the securitized the independent funding trust with alternative financing. receivables represented by the right to future cash The Company is under no contractual obligation to flows after obligations to investors have been met. provide funding to franchisees under such circumstances. In accordance with Canadian GAAP, the financial In accordance with Canadian GAAP, the financial statements of Eagle will not be consolidated with statements of the independent funding trust are not those of the Company. consolidated with those of the Company. Independent Funding Trust Franchisees of the Company Financial Derivative Instruments The Company uses may obtain financing through a structure, involving off-balance sheet financial derivative instruments to independent trusts, that was created to provide loans to manage its exposure to changes in interest rates. the franchisees to facilitate their purchase of inventory For a detailed description of the Company’s off-balance and fixed assets, consisting mainly of fixturing and sheet financial derivative instruments and the related equipment. These trusts are administered by a major accounting policies, see Notes 1 and 18 to the Canadian bank. The independent funding trust within the consolidated financial statements. structure finances its activities through the issuance of short term asset-backed notes to third-party investors. 7. Selected Consolidated Annual Information The total amount of loans issued to the Company’s franchisees outstanding as of December 31, 2005 The following is a summary of selected consolidated was $420 million (2004 – $394 million) including annual information extracted from the Company’s $126 million of loans payable of VIEs consolidated audited consolidated financial statements. This by the Company in 2005. Based on a formula, the information was prepared in accordance with Canadian GAAP and is reported in Canadian dollars. The analysis

16 2005 Financial Report Loblaw Companies Limited of the data contained in the table focuses on the Corporate store sales per average square foot declined trends affecting the financial condition and results from $605 in 2003 (a 53 week year) to $579 in 2005. of operations over the latest two year period. The amount of new net retail square footage and the Selected Consolidated Annual Information timing of the store openings and closures within any given year may vary. The increase in weighted average ($ millions except 2005 2004 2003 net retail square footage was 7.5% in 2005 and where otherwise indicated) (52 weeks) (52 weeks) (53 weeks) 6.4% in 2004. Sales $ 27,801 $ 26,209 $ 25,220 The rollout of The Real Canadian Superstore in Ontario, Sales excluding impact of VIEs(1) 27,423 26,209 25,220 Canada also had an impact on same-store sales in Net earnings 746 968 845 that region by replacing mature, well performing stores that were previously included in same-store sales, Net earnings per and by creating pricing pressure on other Company common share ($) Basic 2.72 3.53 3.07 stores located within the respective trading areas. Adjusted basic(1) 3.35 3.48 3.10 In pursuit of improving its value proposition, Loblaw Diluted 2.71 3.51 3.05 has established price leadership in specific markets

Total asset s (2) 13,761 12,949 12,113 by adopting everyday low pricing strategies. Consistent Long term debt 4,194 3,935 3,956 with its strategy of focusing on food but serving the (excluding amount consumer’s everyday household needs, the Company due within one year) has expanded its general merchandise and drugstore

Dividends declared per offerings over this period and the retail sales growth common share ($) .84 .76 .60 realized in those categories continued to surpass retail sales growth of food. Competitor activity varied by (1) See Non-GAAP financial measures on page 33. market. During the past two years, unprecedented levels (2) Certain prior years’ information was reclassified to conform with the current of retail square footage, mainly associated with food year’s presentation. offerings, have been introduced into certain markets, Sales in 2005 increased 6.1% to $27.8 billion from resulting in pressure on prices and customer retention. $26.2 billion in 2004. Excluding the impact of VIEs Full year 2005 net earnings decreased $222 million sales were $27.4 billion or 4.6% higher than 2004. or 22.9% and basic net earnings per common share Sales growth of 3.9% for the full year 2004 includes decreased 81 cents or 22.9% over 2004. This decline a 2% negative impact from the 53rd week in 2003. included a decrease of 15.2% in operating income and a Same-store sales increased 0.2% in 2005 and 1.5% 5.4% increase in interest expense. The effective income in 2004 on an equivalent 52 week basis. National food tax rate increased to 34.8% in 2005 from 31.5% in 2004. price inflation as measured by CPI was approximately 2% for 2005 compared to 1% to 2% in 2004. The In 2004, net earnings increased $123 million or 14.6% Company’s calculation of food price inflation, which and basic net earnings per common share increased considers Company specific product mix and pricing 46 cents or 15.0% over 2003. The improvement strategy was reasonably consistent with that of CPI. Sales was due to an increase in operating income of 12.6% growth in 2005 was adversely affected by supply chain over 2003 partially offset by a 21.9% increase in disruptions by approximately 0.5% to 0.7% over 2004. interest expense. The effective income tax rate declined to 31.5% in 2004 from 33.5% in 2003. Sales were also influenced by a number of other factors, including changes in net retail square footage, Operating income for the full year 2005 was lower expansion into new services and/or departments and the than in 2004 as a result of ongoing transformative activities of competitors. Over the past two years, an changes and certain other charges outlined previously. average of $1.2 billion annually in capital was invested, Over the two year period, net interest expense increased, resulting in an increase in net retail square footage of primarily due to the increased weighted average approximately 6.2 million square feet or 14.7%. borrowing levels required to support the Company’s

2005 Financial Report Loblaw Companies Limited 17 Management’s Discussion and Analysis

funding requirements. The 2005 increase in the Dividends declared per common share have been effective income tax rate was mainly as a result consistent with the Company’s policy of maintaining a of the impact related to the net effect of stock-based dividend payment equal to approximately 20% to 25% compensation and the associated equity forwards. of the prior year’s adjusted basic net earnings per The 2004 effective income tax rate was positively common share. impacted by the successful resolution of certain income During the two year period ended December 31, 2005, tax matters from a previous year of $14 million. the Company implemented several new accounting Adjusted basic net earnings per common share(1) decreased standards issued by the Canadian Institute of Chartered 3.7% to $3.35 in 2005 from $3.48 in 2004 and Accountants (“CICA”). The new accounting standards increased 12.3% to $3.48 in 2004 from $3.10 in 2003. implemented in 2005 and the resulting impact on the financial position and results of operations are outlined Total assets of the Company continued to increase. Fixed in the Accounting Standards section of this MD&A. assets have grown as a result of the capital investment The following standards were implemented in 2004: program. Inventory growth resulted from an investment • Section 3063, “Impairment of Long-lived Assets”; in general merchandise. Inventory turns of general •AcG 13, “Hedging Relationships”; merchandise categories are lower than those of food • Section 3110, “Asset Retirement Obligations”; categories, resulting in higher aggregate levels of • Emerging Issues Committee (“EIC”) Abstract 144, investment in general merchandise inventories as that “Accounting by a Customer (Including a Reseller) for business developed. A substantial portion of credit card Certain Consideration Received from a Vendor” and receivables is sold to an independent trust and the • Section 3461, “Employee Future Benefits” (for unsecuritized balance net of the allowance for credit enhanced disclosure). losses increased by $94 million since 2003. Cash flows from operating activities have covered a large portion 8. Quarterly Results of Operations of the funding requirements for the Company. For each of 2005 and 2004, total long term debt issued net 8.1 Results by Quarter of the amounts retired was approximately $100 million. The 52 week reporting cycle followed by the Company The amount of fixed rate debt issued in any given year is divided into four quarters of 12 weeks each except is intended to continue to preserve the Company’s for the third quarter which is 16 weeks in duration. liquidity needs. In addition, long term debt increased in The following is a summary of selected consolidated 2005 as a result of consolidating $126 million of VIE financial information derived from the Company’s long term debt ($23 million of which is due within unaudited interim consolidated financial statements one year) pursuant to AcG 15. for each of the eight most recently completed quarters. This information was prepared in accordance with Canadian GAAP and is reported in Canadian dollars. Summary of Quarterly Results(1) (unaudited)

2005 2004 ($ millions except First Second Third Fourth Total First Second Third Fourth Total where otherwise indicated) Quarter Quarter Quarter Quarter (audited) Quarter Quarter Quarter Quarter (audited)

Sales $ 6,124 $ 6,436 $ 8,653 $ 6,588 $ 27,801 $ 5,677 $ 6,069 $ 8,134 $ 6,329 $ 26,209 Net earnings $ 142 $ 211 $ 192 $ 201 $ 746 $ 176 $ 197 $ 258 $ 337 $ 968

Net earnings per common share Basic ($) $ .52 $ .77 $ .70 $ .73 $ 2.72 $ .64 $ .72 $ .94 $ 1.23 $ 3.53 Diluted ($) $ .52 $ .76 $ .70 $ .73 $ 2.71 $ .64 $ .71 $ .94 $ 1.22 $ 3.51

(1) During 2005, the Company implemented AcG 15 retroactively without restatement as described in the “Accounting Standards” section of this MD&A. The implementation of Emerging Issues Committee Abstract 144, “Accounting by a Customer (Including a Reseller) for Certain Consideration received from a Vendor” (“EIC 144”), in the third quarter of 2004 on a retroactive basis with restatement did not result in a material change in the quarterly net earnings.

18 2005 Financial Report Loblaw Companies Limited (1) See Non-GAAP Financial Measures on page 33. Sales growth in 2005 was impacted by various factors. During 2005 and 2004 the Company purchased common Sales from VIEs consolidated by the Company in 2005 shares for cancellation pursuant to its NCIB. The weighted accounted for quarterly sales growth of between 1.2% average number of common shares outstanding has not and 1.7% when compared to the respective quarters in been significantly impacted by these purchases. 2004. Sales growth during the last two quarters of 8.2 Fourth Quarter Results 2005 continued to be negatively impacted by supply The following is a summary of selected consolidated chain disruptions which started earlier in the year. information for the fourth quarter of 2005 extracted from Net retail square footage increased by 2.8 million the Company’s preliminary unaudited consolidated square feet in 2005 and was somewhat weighted over financial statements. This information was prepared in the last two quarters. Same-store sales growth declined accordance with Canadian GAAP and is reported in during the year from 2.4% in the first quarter to Canadian dollars. The analysis of the data contained a decline of approximately 0.7% in the fourth quarter. in the table focuses on the results of operations Overall national food price inflation, as measured and changes in the financial condition and cash flows by CPI, during 2005 was approximately 2%, trending in the fourth quarter. downwards in the last quarter of the year. Selected Consolidated Information for the Fourth Quarter Fluctuations in quarterly net earnings in 2005 (unaudited) reflect the impact of restructuring and other charges 2005 2004 resulting from the ongoing transformative changes. ($ millions except where otherwise indicated) (12 weeks) (12 weeks) Quarter-to-quarter variability was also caused by Sales $ 6,588 $ 6,329 the following: Sales excluding impact of VIEs(1) 6,501 6,329 • Fluctuations in stock-based compensation net of the Operating income 394 530 impact of the associated equity forwards as a result Adjusted operating income(1) 441 522 of changes in the market price of the Company’s Interest expense 61 56 common shares; Income taxes 132 137 • $30 million of direct costs in 2005 related to the Net earnings 201 337 handling, storage and movement of inventory from Net earnings per common share ($) supply chain disruptions, of which $20 million Basic .73 1.23 was incurred in the third quarter and an additional Adjusted basic(1) .94 1.17 $10 million was incurred in the fourth quarter; Diluted .73 1.22 • $40 million in GST and PST related charges recorded Cash flows from (used in): in the third quarter of 2005; and Operating activities 830 894 • Higher than normal inventory shrink in the general Investing activities (456) (430) merchandise categories throughout 2005 with Financing activities (333) (489) some progress back to more normal levels in the Dividends declared fourth quarter. per common share ($) .21 .19 Interest expense increased in the third and fourth quarters of 2005 over 2004 primarily due to the (1) See Non-GAAP financial measures on page 33. maturity of a portion of the interest rate swaps. Sales for the fourth quarter of 2005 increased 4.1% or The change in the quarterly effective income tax rate $259 million to $6.6 billion from $6.3 billion reported for 2005 over 2004 was primarily due to the change in the fourth quarter of 2004, including an increase of in the proportion of taxable income across different 1.4% or $87 million related to the consolidation of tax jurisdictions, the income tax impact related to certain independent franchisees. stock-based compensation and the associated equity forwards and a reversal of $14 million due to the successful resolution in the first quarter of 2004 of certain income tax matters from a previous year.

2005 Financial Report Loblaw Companies Limited 19 Management’s Discussion and Analysis

Sales and Sales Growth Excluding Impact of VIEs(1) charges and incremental direct costs of approximately $10 million related to supply chain disruptions. A charge ($ millions except 2005 2004 of $27 million related to stock-based compensation where otherwise indicated) (12 weeks) (12 weeks) net of the impact of the associated equity forwards was Total sale s $ 6,588 $ 6,329 also recorded in the fourth quarter and compared to Less: Sales attributable to $8 million income in 2004. These items in addition the consolidation of VIEs to the negative $4 million VIE impact, accounted pursuant to AcG 15 87 for a decline in operating margin of approximately (1) Sales excluding impact of VIEs $ 6,501 $ 6,329 0.8 of a percentage point for the quarter. Total sales growth(2) 4.1% (0.7)% The effective income tax rate for the fourth quarter of Less: Positive impact on sales growth attributable to the 2005 increased to 39.6% from 28.9% in 2004 mainly consolidation of VIEs as a result of the change in the income tax impact pursuant to AcG 15 1.4% related to stock-based compensation and the associated Sales growth excluding impact of VIEs(1) 2.7% (0.7)% equity forwards. Net earnings for the quarter were at $201 million, (1) See Non-GAAP Financial Measures on page 33. $136 million or 40.4% below the same period last year. (2) Sales growth in 2004 calculated on a 13 week base in 2003. The extra week in 2003 had a negative impact of approximately 7.5% Basic net earnings per common share decreased on the 2004 sales growth shown in the table above. 50 cents, or 40.7%, to 73 cents in 2005 from $1.23 in (1) Sales in the fourth quarter continued to be negatively 2004. Adjusted basic net earnings per common share impacted by the supply chain disruptions which started decreased 23 cents or 19.7% to 94 cents in 2005 from earlier in 2005. Some improved stability had been $1.17 in 2004. realized in the latter part of the quarter but significant Fourth quarter cash flows from operating activities improvements are not expected to be felt until mid-2006. were $830 million in 2005 compared to $894 million The Real Canadian Superstore program has been in 2004. The decrease was mainly a result of lower net positively received in Ontario and has enjoyed growth earnings before minority interest. Fourth quarter cash in both absolute and same-store sales. flows used in investing activities were $456 million in Fourth quarter same-store sales in 2005 declined 2005 compared to $430 million in 2004. approximately 0.7% when compared to the same period Fourth quarter cash flows used in financing activities last year. Expected sales growth was also negatively were $333 million in 2005 compared to $489 million impacted by approximately 0.9% to 1.2% for the in 2004, decreasing mainly due to the repayment of the quarter due to supply chain disruptions and a drop in Company’s $100 million 6.35% Provigo Inc. Debenture service levels. During the quarter, 17 new corporate as it matured during the fourth quarter of 2004. and franchised stores were opened and 9 stores were closed, resulting in a net increase of 0.8 million square Further discussion and analysis of the fourth quarter feet of retail square footage. The Company’s calculation results was provided in the Company’s 2005 Fourth of food price inflation was reasonably consistent with Quarter News Release which is available online at the national food price inflation as measured by CPI of www.sedar.com. approximately 1% for the quarter. 9. Disclosure Controls and Procedures Operating income for the fourth quarter of 2005 Based on an evaluation of the Company’s disclosure decreased $136 million or 25.7% from the fourth controls and procedures, the Company’s President quarter of 2004 to $394 million. Operating margin and Executive Vice President have concluded that declined to 6.0% from 8.4% in the comparable period these controls and procedures were effective as of of 2004. Fourth quarter operating income in 2005 December 31, 2005. included a $6 million charge for restructuring and other

20 2005 Financial Report Loblaw Companies Limited (1) See Non-GAAP Financial Measures on page 33. 10. Risks and Risk Management the Company continuously evaluates and implements 10.1 Operating Risks and Risk Management various cost saving initiatives. The Company may not always achieve the expected cost savings and In the normal course of business, the Company is exposed other benefits of these initiatives, which could negatively to operating risks that have the potential to negatively impact the Company’s financial performance. affect its financial performance. The Company has operating and risk management strategies and insurance The Company continuously evaluates the markets programs which help to minimize these operating risks. it operates in and will enter new markets and review acquisitions when opportunities arise and will also exit a Industry The retail industry in Canada is a changing particular market and reallocate assets elsewhere when and competitive market. Consumer needs drive industry there is a strategic advantage to doing so. The Company changes, which are impacted by changing demographic pursues a strategy of enhancing profitability on a and economic trends such as changes in disposable market-by-market basis using a multi-format approach. income, increasing ethnic diversity, nutritional awareness By operating across Canada through corporate stores, and time availability. Over the past several years, franchised stores and associated stores and by servicing consumers have demanded more choice, value and independent accounts, the Company strategically convenience. If the Company is ineffective in responding minimizes and balances its exposure to industry and to these demands, its financial performance could be competitive risks. negatively impacted. Increased competition could adversely affect the The Company monitors its market share and the market Company’s ability to achieve its objectives. The in which it operates, and will adjust its operating Company’s inability to compete effectively with its strategies, which include, but are not limited to, relocating current or any future competitors could result in, among stores or reformatting them under a different banner, other things, lessening of market share and lower reviewing pricing and adjusting product offerings and pricing in response to its competitors’ pricing activities. marketing programs. The Company’s control label Accordingly, the Company’s competitive position and program represents a significant competitive advantage financial performance could be negatively impacted. because it enhances customer loyalty by offering superior value and provides some protection against Food Safety and Public Health The Company is subject to national brand pricing strategies. potential liabilities connected with its business operations, including potential exposures associated with product Competitive Environment The Company faces increasing defects, food safety and product handling. Such liabilities competition from many types of non-traditional may arise in relation to the storage, distribution and competitors, such as mass merchandisers, warehouse display of products and, with respect to the Company’s clubs, drugstores, limited assortment stores, discount control label products, in relation to the production, stores, convenience stores and specialty stores, all packaging and design of products. of which continue to increase their offerings of products typically associated with traditional supermarkets. A majority of the Company’s sales are generated from In order to compete effectively and efficiently, the food products and the Company could be vulnerable Company is developing and operating new departments in the event of a significant outbreak of food-borne and services that complement the traditional supermarket illness or increased public health concerns in connection layout, as well as enhancing its product and service with certain food products. Such an event could offerings. The Company is also subject to competitive negatively affect the Company’s financial performance. pressures from new entrants into the marketplace Procedures are in place to manage such events should and from the potential consolidation of existing they occur. These procedures identify risks, provide competitors. These competitors may have extensive clear communication to employees and consumers and resources which will allow them to compete effectively ensure that potentially harmful products are removed with the Company in the long term. In order to remain from inventories immediately. Food safety related competitive by having an optimal cost structure,

2005 Financial Report Loblaw Companies Limited 21 Management’s Discussion and Analysis

liability exposures are insured by the Company’s Employee Future Benefit Contributions While the Company’s insurance program. In addition, the Company has registered funded defined benefit pension plans are food safety policies and programs which address currently adequately funded and returns on pension plan safe food handling and preparation standards. assets are in line with expectations, there is no assurance The Company endeavours to employ best practices that this will continue. An extended period of depressed for the storage and distribution of food products and is capital markets and low interest rates could require intensifying the campaign for consumer awareness of the Company to make contributions to its registered safe food handling and consumption. funded defined benefit pension plans in excess of those currently contemplated, which in turn could have a In the event of a significant public health crisis, such negative effect on its financial performance. as a flu or other type of pandemic, it is possible that significant numbers of customers may choose to During 2005, the Company contributed $59 million limit their activities outside of their home, including (2004 – $40 million) to its registered funded defined shopping trips, thereby negatively impacting the benefit pension plans. During 2006, the Company Company’s sales. Furthermore, it may not be possible expects to contribute approximately $61 million to these to adequately staff all the Company’s stores during such plans. In 2006, the Company also expects to make a an event. The Company is in the process of preparing contribution of $16 million to the long term disability a plan for its approach to such an event. plan in addition to contributions to defined contribution pension plans and multi-employer pension plans, as well Labour A significant portion of the Company’s workforce as benefit payments to the beneficiaries of the unfunded is unionized. Renegotiating collective agreements might defined benefit pension and other benefit plans. result in work stoppages or slowdowns, which could negatively affect the Company’s financial performance, In addition to the Company-sponsored pension plans, the depending on their nature and duration. The Company is Company participates in various multi-employer pension willing to accept the short term costs of labour disruption plans, providing pension benefits in which approximately in order to negotiate competitive labour costs and 40% (2004 – 41%) of employees of the Company and operating conditions for the longer term. Significant of its franchisees participate. The administration of these labour negotiations took place across the Company in plans and the investment of their assets are legally 2005 as 54 collective agreements expired and another controlled by a board of independent trustees generally 61 collective agreements were successfully negotiated consisting of an equal number of union and employer which represented a combination of agreements expiring representatives. In some circumstances, Loblaw may in 2005, those carried over from prior years, and those have a representative on the board of trustees of negotiated early. In 2006, 79 collective agreements these multi-employer pension plans. The Company’s affecting approximately 41,354 employees will expire, responsibility to make contributions to these plans is with the single largest agreement covering approximately limited by the amounts established pursuant to its 14,300 employees. The Company will also continue collective agreements. Pension cost for these plans to negotiate the 35 collective agreements carried over is recognized as contributions are paid. The Financial from 2003, 2004 and 2005 and anticipates no labour Services Commission of Ontario has recently issued disruption with respect to these negotiations. The a report concerning one of these multi-employer Company has good relations with its employees and pension plans. The report deals with alleged breaches unions and, although it is possible, does not anticipate of the Ontario pension and benefits legislation in any unusual difficulties in renegotiating these agreements. connection with certain of the investments of the plan under review and its governance practices. Several of the Company’s competitors operate in a non-union environment. These competitors may benefit Third-Party Service Providers Certain aspects of the from lower labour costs, making it more difficult for Company’s business are significantly affected by third the Company to compete. parties. While appropriate contractual arrangements are put in place with these third parties, the Company

22 2005 Financial Report Loblaw Companies Limited has no direct influence over how such third parties are monitor their relationships with all third-party service managed. It is possible that negative events affecting providers. PC Bank has developed a vendor management these third parties could in turn negatively impact the policy, approved by its Board of Directors, and provides Company’s operations and its financial performance. its Board with regular reports on vendor management and risk assessment. PC Financial home and auto A large portion of the Company’s case-ready meat insurance products are provided by companies within the products are produced by a third party which operates Aviva Canada group, the Canadian subsidiary of a major facilities dedicated to Loblaw. international property and casualty insurance provider. The Company’s control label products which are among Real Estate The availability and conditions affecting the the most recognized brands in Canada are manufactured acquisition and development of real estate properties under contract by third-party vendors. In order to may impact the Company’s ability to execute its planned preserve the brands’ equity, these vendors are held real estate program on schedule and therefore, its ability to high standards of quality. to achieve its sales targets. Real estate development The Company also uses third-party logistic services plans may be contingent on successful negotiation of including those in connection with a dedicated labour agreements with respect to same-site expansion warehouse and distribution centre in Pickering, Ontario or redevelopment. As the Company expands its general and third-party common carriers. Any disruption in these merchandise offering, on-time execution of the real services could interrupt the delivery of merchandise to estate program becomes increasingly important due the stores and therefore could negatively impact sales. to significantly longer lead times required for ordering this merchandise. Delays in execution could lead to President’s Choice Financial banking services are inventory management issues. The Company maintains provided by a major Canadian chartered bank. PC Bank a significant portfolio of owned retail real estate and, uses third-party service providers to process credit whenever practical, pursues a strategy of purchasing card transactions, operate call centres and monitor sites for future store locations. This enhances the credit and fraud for the President’s Choice Financial Company’s operating flexibility by allowing the Company MasterCard®. In order to minimize operating risk, to introduce new departments and services that PC Bank and the Company actively manage and could be precluded under operating leases. At year end 2005, the Company owned 72% (2004 – 70%) of its Corporate Stores Owned vs. Leased corporate store square footage. (thousands of sq. ft.) Seasonality The Company’s operations as they relate 40,000 to food, specifically inventory levels, sales volume and product mix, are impacted to some degree by certain 30,000 holiday periods in the year. As the Company expands the breadth of its general merchandise offering, it 20,000 may increase the number of seasonal products offered and its operations may therefore be subject to more 10,000 seasonal fluctuations.

0 Leadership Development and Employee Retention Effective 2001 2002 2003 2004 2005 leadership is essential to sustaining the growth and Owned Leased success of the Company. The Company continues to focus on the development of leaders at all levels and across all regions by executing tailored leadership development programs that provide the knowledge and skills necessary to drive positive change and ensure

2005 Financial Report Loblaw Companies Limited 23 Management’s Discussion and Analysis

effective execution. The degree to which the Company competitive pressures for economic growth and cost is effective in developing its leaders and retaining efficiency must be integrated with sound environmental key employees could affect its ability to execute its stewardship and ecological considerations. Environmental strategies, efficiently run its operations and meet protection requirements do not and are not expected its goals for financial performance. to have an adverse effect on the Company’s financial performance. A new office facility and Store Support Centre in Brampton, Ontario opened in the third quarter of The Environmental, Health and Safety Committee of 2005 combining several administrative and operating the Board receives regular reporting from management offices from across and the general addressing current and potential future issues, merchandise operations from Calgary, Alberta. identifying new legislative concerns and related In addition, internal reorganizations involving the communication efforts. merchandising, procurement and operations groups took Ethical Business Conduct Any failure of the Company effect. These initiatives may result in further short term to adhere to its policies, the law or ethical business employee turnover and disruption as certain employees practices could significantly affect its reputation and may assume new roles and responsibilities. brands and could therefore, negatively impact the Utility and Fuel Prices The Company is a significant Company’s financial performance. The Company has consumer of electricity, other utilities and fuel. adopted a Code of Business Conduct which employees Unanticipated cost increases in these items could of the Company are required to acknowledge and negatively affect the Company’s financial performance. agree to on a regular basis. The Company has established an Ethics and Business Conduct Committee which Insurance The Company limits its exposure to risk through monitors compliance with the Code of Business Conduct a combination of appropriate levels of self-insurance and and determines how the Company can best ensure the purchase of various insurance coverages including it is conducting its business in an ethical manner. an integrated insurance program. The Company’s The Company has also adopted a Vendor Code of insurance program is based on various lines and limits Conduct which outlines its ethical expectations to of coverage which provides the appropriate level of its vendor community in a number of areas, including retained and insured risks. Insurance is arranged on a social responsibility. multi-year basis with reliable, financially stable insurance companies as rated by A.M. Best Company, Inc. The Legal, Taxation and Accounting Changes to any of the laws, Company combines comprehensive risk management rules, regulations or policies related to the Company’s programs and the active management of claims handling business including the production, processing, and litigation processes by using internal professionals preparation, distribution, packaging and labelling of its and external technical expertise to manage the risk products could have an adverse impact on its financial it retains. and operational performance. In the course of complying with such changes, the Company may incur significant Environmental, Health and Safety The Company has costs. Failure by the Company to fully comply with environmental, health and workplace safety programs applicable laws, rules, regulations and policies may in place and has established policies and procedures subject it to civil or regulatory actions or proceedings, aimed at ensuring compliance with applicable legislative including fines, assessments, injunctions, recalls requirements. To this end, the Company employs risk or seizures, which may have an adverse effect on the assessments and audits using internal and external Company’s financial results. resources together with employee awareness programs throughout its operating locations. There can be no assurance that the tax laws and regulations in the jurisdictions affecting the Company The Company endeavours to be socially and will not be changed in a manner which could adversely environmentally responsible, and recognizes that the affect the Company. New accounting pronouncements

24 2005 Financial Report Loblaw Companies Limited introduced by appropriate authoritative bodies may also exposure against foreign currency exchange rate impact the Company’s financial results. fluctuations on a portion of its United States dollar denominated assets, principally cash, cash equivalents Holding Company Structure Loblaw Companies Limited is a and short term investments. holding company. As such, it does not carry on business directly but does so through its subsidiaries. It has no Interest Rate The Company enters into interest rate major source of income or assets of its own, other than swaps to manage its current and anticipated exposure the interests it has in its subsidiaries, which are all to fluctuations in interest rates and market liquidity. separate legal entities. Loblaw Companies Limited is Interest rate swaps are transactions in which the therefore financially dependent on dividends and other Company exchanges interest flows with a counterparty distributions it receives from its subsidiaries. on a specified notional amount for a predetermined period based on agreed upon fixed and floating interest 10.2 Financial Risks and Risk Management rates. Notional amounts are not exchanged. The In the normal course of business, the Company is Company monitors market conditions and the impact exposed to financial risks that have the potential of interest rate fluctuations on its fixed and floating to negatively affect its financial performance including interest rate exposure mix on an ongoing basis. financial risks related to changes in foreign currency exchange rates, interest rates and the market price of Common Share Market Price The Company enters into the Company’s common shares. These risks and the equity forwards to manage its current and anticipated actions taken to minimize them are discussed below. exposure to fluctuations in its stock-based compensation The Company is also exposed to credit risk on certain cost as a result of changes in the market price of its of its financial instruments. common shares. These equity forwards change in value as the market price of the underlying common shares Financial Derivative Instruments The Company uses over- changes, which results in a partial offset to fluctuations the-counter financial derivative instruments, specifically in the Company’s stock-based compensation costs. cross currency basis swaps, interest rate swaps and The partial offset between the Company’s stock-based equity forwards, to minimize the risks and costs compensation costs and the equity forwards exists associated with its financing activities and its stock-based as long as the market price of the Company’s common compensation plans. The Company maintains treasury shares exceeds the exercise price of employee stock centres that operate under policies and guidelines options. As disclosed in Note 17 to the consolidated approved by the Board covering funding, investing, financial statements, 2,254,639 stock options had equity, foreign currency exchange and interest rate exercise prices which were greater than the market price management. The Company’s policies and guidelines of the Company’s common shares at year end. prevent it from using any financial derivative instrument for trading or speculative purposes. See Counterparty Over-the-counter financial derivative Notes 1 and 18 to the consolidated financial statements instruments are subject to counterparty risk. Counterparty for additional information on the Company’s financial risk arises from the possibility that market changes derivative instruments. may affect a counterparty’s position unfavourably and that the counterparty defaults on its obligations to the Foreign Currency Exchange Rate The Company enters into Company. The Company has sought to minimize potential cross currency basis swaps to manage its current and counterparty risk and losses by conducting transactions anticipated exposure to fluctuations in foreign currency for its derivative agreements with counterparties exchange rates. The Company’s cross currency basis that have at minimum a long term A credit rating from swaps are transactions in which floating interest a recognized credit rating agency and by placing risk payments and principal in United States dollars are adjusted limits on its exposure to any single counterparty exchanged against the receipt of floating interest for its financial derivative agreements. The Company payments and principal in Canadian dollars. These has internal policies, controls and reporting processes, cross currency basis swaps limit the Company’s which require ongoing assessment and corrective

2005 Financial Report Loblaw Companies Limited 25 Management’s Discussion and Analysis

action, if necessary, with respect to its derivative Company) are related parties. It is the Company’s policy transactions. In addition, principal amounts on cross to conduct all transactions and settle balances with currency basis swaps and equity forwards are each related parties on market terms and conditions. netted by agreement and there is no exposure to Related party transactions between the Company and loss of the original notional principal amounts on Weston include: the interest rate swaps and equity forwards. • inventory purchases, Credit The Company’s exposure to credit risk relates • cost sharing agreements, to the Company’s cash equivalents and short term •real estate leases, investments, PC Bank’s credit card receivables and •borrowings/lendings, accounts receivable from franchisees, associates • income tax matters, and and independent accounts. • management agreements.

Credit risk associated with the Company’s cash During 2005, Glenhuron Bank Limited (“Glenhuron”), equivalents and short term investments results from a wholly owned subsidiary of the Company, sold the possibility that a counterparty may default on the a portfolio of third-party long term loans receivable repayment of a security. This risk is mitigated by the to a wholly owned subsidiary of George Weston established policies and guidelines that require issuers of Limited. Originally, the loans in this portfolio were permissible investments to have at minimum a long term acquired from third-party financial institutions in A credit rating from a recognized credit rating agency 2001. This transaction was undertaken by Glenhuron and that specify minimum and maximum exposures to as part of its overall ongoing management of its specific issuers. investment portfolio.

PC Bank manages the President’s Choice Financial The amount of the cash consideration of U.S.$106 million MasterCard®. PC Bank grants credit to its customers was based on a fair market value of the loan portfolio on President’s Choice Financial MasterCard® with the and was approximately equal to carrying value. An intention of increasing the loyalty of those customers independent review of the valuation analysis has been and the Company’s profitability. Credit risk results from obtained by the Company to ensure that Glenhuron’s the potential for loss due to those customers defaulting methodology used in arriving at fair market value was on their payment obligations. In order to minimize the reasonable. As at the date of sale, the current portion associated credit risk, PC Bank employs stringent credit of this loan portfolio of U.S.$13 million was included scoring techniques, actively monitors the credit card in accounts receivable and the long term portion of portfolio and reviews techniques and technology that U.S.$93 million was included in other assets. can improve the effectiveness of its collection process. Glenhuron has entered into an agreement with the In addition, these receivables are dispersed among George Weston Limited subsidiary for the administration a large, diversified group of credit card customers. of the loan portfolio. The Company also has accounts receivable from For a detailed description of the Company’s related its franchisees, associates and independent accounts, party transactions, see Note 20 to the consolidated mainly as a result of sales to these customers. The financial statements. Company actively monitors the balances on an ongoing basis and collects funds from its franchisees on a 12. Critical Accounting Estimates frequent basis in accordance with terms specified in the applicable agreements. The preparation of financial statements in accordance with Canadian GAAP requires management to make 11. Related Party Transactions estimates and assumptions that affect the reported amounts and disclosures made in the consolidated The Company’s majority shareholder, George Weston financial statements and accompanying notes. Limited and its affiliates (“Weston”) (other than the

26 2005 Financial Report Loblaw Companies Limited Management continually evaluates the estimates and rate, the expected long term rate of return on plan assumptions it uses. These estimates and assumptions assets, the expected growth rate of health care costs, are based on management’s historical experience, the rate of compensation increase, retirement ages and best knowledge of current events and conditions and mortality rates. These assumptions are reviewed annually activities that the Company may undertake in the future. by management and the Company’s actuaries. Actual results could differ from these estimates. The discount rate, the expected long term rate of return The estimates and assumptions described in this on plan assets and the expected growth rate in health section depend upon subjective or complex judgments care costs are the three most significant assumptions. about matters that may be uncertain and changes The discount rates are based on market interest rates, in these estimates and assumptions could materially as at the Company’s measurement date of September 30 impact the consolidated financial statements. on a portfolio of Corporate AA bonds with terms to 12.1 Valuation of Inventories maturity that, on average, match the terms of the Certain retail store inventories are stated at the lower accrued benefit plan obligations. The discount rates of cost and estimated net realizable value less normal used to determine the 2005 net cost for defined benefit gross profit margin. Significant estimation or judgment is pension and other benefit plans were 6.25% and 6.1%, required in the determination of (i) discount factors used respectively, on a weighted average basis, compared to convert inventory to cost after a physical count at to 6.25% and 6.0%, respectively, in 2004. Certain retail has been completed and (ii) estimated inventory defined benefit pension and other benefit plans affected losses, or shrinkage, occurring between the last physical by the plan to restructure the supply chain operations inventory count and the balance sheet date. nationally, were remeasured as at March 31, 2005. For these plans, costs subsequent to April 1, 2005 were Inventories counted at retail are converted to cost determined using a discount rate of 5.75%, resulting in by applying a discount factor to retail selling prices. a nominal impact to net earnings and curtailment gains This discount factor is determined at a category which were offset against unamortized net actuarial or department level, is calculated in relation to historical losses for these plans. Additional defined benefit gross margins and is reviewed on a regular basis pension costs also resulted from the restructuring plan for reasonableness. and were recorded in restructuring and other charges Inventory shrinkage, which is calculated as a percentage in the consolidated statement of earnings. The discount of sales, is evaluated throughout the year and provides rates used to determine the net 2006 defined benefit for estimated inventory shortages from the last physical pension and other benefit plans costs decreased count to the balance sheet date. To the extent that to 5.25% and 5.2%, respectively and as a result, the actual losses experienced vary from those estimated, Company expects an increase in these costs in 2006. both inventories and operating income may be impacted. The expected long term rate of return on plan assets Changes or differences in these estimates may result is based on historical returns, on the asset mix and in changes to inventories on the consolidated balance on the active management of defined benefit pension sheet and a charge or credit to operating income in plan assets. The Company’s defined benefit pension plan the consolidated statement of earnings. assets had a 10 year annualized return of 9.3% as at the 2005 measurement date. The actual annual returns 12.2 Employee Future Benefits within this 10 year period varied with market conditions. The cost and accrued benefit plan obligations of the Consistent with 2005, the Company has assumed Company’s defined benefit pension plans and other an 8.0% expected long term rate of return on plan benefit plans are accrued based on actuarial valuations assets in calculating its defined benefit pension plans which are dependent on assumptions determined by cost for 2006. management. These assumptions include the discount

2005 Financial Report Loblaw Companies Limited 27 Management’s Discussion and Analysis

The expected growth rate in health care costs for 2005 level, the carrying value of goodwill exceeds the implied was based on external data and the Company’s historical fair value. Any goodwill impairment will result in trends. Higher initial growth rates were used in 2006, a reduction in the carrying value of goodwill on the when compared to 2005. consolidated balance sheet and in the recognition of a non-cash impairment charge in operating income in Since the three key assumptions discussed above are the consolidated statement of earnings. forward-looking and long term in nature, they are subject to uncertainty and actual results may differ. Differences The Company determines the fair value of its reporting between actual experience and the assumptions and units using a discounted cash flow model corroborated changes in the assumptions may result in changes to by other valuation techniques such as market multiples. the accrued benefit plan asset and liability presented in The process of determining these fair values requires the consolidated balance sheet and the defined benefit management to make estimates and assumptions pension and other benefit plans cost recognized in the including, but not limited to projected future sales, consolidated statement of earnings. earnings and capital investment, discount rates and terminal growth rates. Projected future sales, earnings In accordance with Canadian GAAP, the difference and capital investment are consistent with strategic between actual results and assumptions are accumulated plans presented to the Company’s Board. Discount in net actuarial gain or loss. The magnitude of any rates are based on an industry weighted average cost of immediate impact to the Company’s operating income capital. These estimates and assumptions may change is mitigated by the fact that the excess net accumulated in the future due to uncertain competitive and economic actuarial gain or loss over 10% of the greater of the market conditions or changes in business strategies. accrued benefit plan obligation or the fair value of the plan assets at the beginning of the year is amortized The Company performed the annual goodwill impairment over the expected average remaining service period of test and it was determined that the fair value of each of the active employees. As at September 30, 2005, the the reporting units exceeded its respective carrying value unamortized net actuarial loss was $271 million (2004 and therefore, no goodwill impairment was identified. – $137 million) for defined benefit pension plans and 12.4 Income Taxes $128 million (2004 – $70 million) for other benefit plans. Future income tax assets and liabilities are recognized Additional information regarding the Company’s pension for the future income tax consequences attributable and other benefit plans, including a sensitivity analysis to temporary differences between the financial statement for changes in key assumptions, is provided in Note 13 carrying values of assets and liabilities and their to the consolidated financial statements and in the respective income tax bases. Future income tax assets Employee Future Benefit Contributions discussion in or liabilities are measured using enacted or substantively the Operating Risks and Risk Management section of enacted income tax rates expected to apply to taxable this MD&A. income in the years in which those temporary differences are expected to be recovered or settled. The calculation 12.3 Goodwill of current and future income taxes requires management Goodwill is not amortized and is assessed for impairment to make estimates and assumptions and to exercise at the reporting unit level at least annually. Any judgment regarding the financial statement carrying potential goodwill impairment is identified by comparing values of assets and liabilities which are subject to the fair value of a reporting unit to its carrying value. accounting estimates inherent in those balances, the If the fair value of the reporting unit exceeds its carrying interpretation of income tax legislation across various value, goodwill is considered not to be impaired. If the jurisdictions, expectations about future operating results carrying value of the reporting unit exceeds its fair value, and the timing of reversal of temporary differences and a more detailed goodwill impairment assessment must possible audits of tax filings by the regulatory authorities. be undertaken. A goodwill impairment loss would be Management believes it has adequately provided for recognized to the extent that, at the reporting unit income taxes based on current available information.

28 2005 Financial Report Loblaw Companies Limited Changes or differences in these estimates or assumptions lack the characteristics of a controlling financial may result in changes to the current or future income interest. AcG 15 requires the primary beneficiary to tax balances on the consolidated balance sheet, consolidate VIEs. a charge or credit to income tax expense in the AcG 15 considers an entity to be the primary beneficiary consolidated statement of earnings and may result of a VIE if it holds variable interests that expose it in cash payments or receipts. to a majority of the VIE’s expected losses or that entitle 12.5 Goods and Services Tax (“GST”) and Provincial Sales Taxes (“PST”) it to receive a majority of the VIE’s expected residual During the third quarter of 2005, the Company recorded returns or both. a charge relating to an audit and proposed assessment Prior to AcG 15, the Company consolidated all entities by the Canada Revenue Agency relating to GST on certain that it controlled through ownership of a majority products sold between 2000 and 2002 on which GST of voting interests. Effective January 2, 2005, the was not appropriately charged and remitted. In light of Company implemented AcG 15, retroactively without this proposed assessment, the Company assessed and restatement of prior periods and as a result, the estimated the potential liabilities for GST and PST in Company consolidates entities in which it has other areas of its operations for various periods up to the control through ownership of a majority of the end of 2004. Accordingly, a charge of $40 million was voting interests as well as all VIEs for which it is recorded in operating income in the third quarter to the primary beneficiary. reflect management’s best estimate of all such potential tax liabilities of which management is currently aware. Upon implementation of AcG 15, the Company Approximately $15 million of this amount was settled identified the following significant VIEs: during the fourth quarter of 2005. The ultimate remaining Independent Franchisees The Company enters into various amount paid will depend on the outcome of audits forms of franchise agreements that generally require performed by, or settlements reached with the various the independent franchisee to purchase inventory from tax authorities and therefore may differ from this the Company and pay certain fees in exchange for estimate. Management will continue to assess the services provided by the Company and for the right remaining accrual as progress towards resolution with to use certain trademarks and licences owned by the the various tax authorities is made and will adjust Company. Independent franchisees generally lease the the remaining accrual accordingly. Changes in this land and building from the Company, and when eligible, accrual may result in a charge or credit to operating may obtain financing through a structure involving income in the consolidated statement of earnings. independent trusts to facilitate the purchase of the 13. Accounting Standards majority of their inventory and fixed assets, consisting mainly of fixturing and equipment. These trusts are 13.1 Accounting Standards Implemented in 2005 administered by a major Canadian bank. Under the Effective January 2, 2005, the Company implemented terms of certain franchise agreements, the Company the following accounting standards issued by the CICA: may also lease equipment to independent franchisees. Independent franchisees may also obtain financing • Accounting Guideline 15, “Consolidation of Variable through operating lines of credit with traditional financial Interest Entities”, issued by the CICA in June 2003 institutions or through issuing preferred shares or and amended in September 2004 requires the notes payable to the Company. The Company monitors consolidation of certain entities that are subject to the financial condition of its independent franchisees control on a basis other than through ownership and provides for estimated losses or write-downs of a majority of voting interests. on its accounts and notes receivable or investments AcG 15 defines a variable interest entity as an entity when appropriate. Upon implementation of AcG 15, that either does not have sufficient equity at risk the Company determined that 121 of its independent to finance its activities without subordinated financial franchisee stores met the criteria for VIEs that require support or where the holders of the equity at risk consolidation by the Company pursuant to AcG 15.

2005 Financial Report Loblaw Companies Limited 29 Management’s Discussion and Analysis

Warehouse and Distribution Agreement The Company has Accordingly, the Company has included the results entered into a warehousing and distribution agreement of these independent franchisees and this third-party with a third party to provide to the Company entity that provides distribution and warehousing distribution and warehousing services from a services in its consolidated financial statements dedicated facility. The Company has no equity interest effective January 2, 2005. in this third party; however, the terms of the Details of the amounts recorded upon implementation agreement with the third party are such that the and the effect on the opening consolidated balance Company has determined that the third party meets sheet as at January 2, 2005 are summarized below the criteria for a VIE that requires consolidation by the and include the impact of both the independent Company. As a result of the fee structure agreed to franchisees and the warehouse and distribution entity: with this third party, the impact of the consolidation of this warehouse and distribution entity was not material.

Condensed Consolidated Balance Sheet as at January 2, 2005

Condensed consolidated balance Impact of the Condensed consolidated balance sheet as at January 2, 2005 implementation sheet as at January 2, 2005 ($ millions) before AcG 15 impact of AcG 15 after AcG 15 impact

Cash and cash equivalents $ 549 $ 20 $ 569 Short term investments 275 275 Accounts receivable 665 (73) 592 Inventories 1,821 78 1,899 Other current assets 113 4 117

Total current assets 3,423 29 3,452 Fixed assets 7,113 136 7,249 Goodwill 1,621 3 1,624 Other assets 792 (51) 741

Total asset s $ 12,949 $ 117 $ 13,066

Total current liabilities $ 3,133 $ 48 $ 3,181 Long term debt 3,935 96 4,031 Other liabilities 467 (8) 459 Minority interest 10 10

Total liabilities 7,535 146 7,681

Common share capital 1,192 1,192 Retained earnings 4,222 (29) 4,193

Total liabilities and shareholders’ equity $ 12,949 $ 117 $ 13,066

The impact of AcG 15 on the opening consolidated doubtful accounts previously recorded by the Company balance sheet can be further explained as follows: and the reversal of initial franchise fees initially • An after-tax, one-time charge of $29 million (net recognized upon the sale of franchises to third parties. of income taxes of $12 million) was recorded upon • Accounts receivable due from the independent implementation and resulted mainly from delaying franchisees and the investment in preferred shares the recognition of vendor monies to when the related of the independent franchisees were eliminated upon inventories of the independent franchisees are sold consolidation; cash and cash equivalents, inventories to their customers, the excess of the independent and fixed assets financed by long term debt (a portion franchisees’ accumulated losses over the allowance for of which is due within one year) were recorded.

30 2005 Financial Report Loblaw Companies Limited • An increase in fixed assets and total current liabilities for accordingly. The assessment should be based on in respect of the warehouse and distribution entity. whether the fulfillment of the arrangement is dependent • Minority interest representing the common on the use of specific tangible assets and whether the stakeholder’s equity in the respective VIEs. arrangement conveys the right to control the use of the tangible assets. This assessment should be made As at December 31, 2005, 123 of the Company’s at inception of the arrangement and only reassessed independent franchise stores met the criteria for a VIE if certain conditions are met. EIC 150 is effective and were consolidated pursuant to AcG 15. for arrangements entered into or modified as of the The impact from the consolidation of these VIEs on the beginning of 2005 and did not have any impact during consolidated balance sheet as at December 31, 2005 2005. The Company will continue to monitor whether was not significantly different than the impact on the EIC 150 is applicable to transactions undertaken opening consolidated balance sheet as outlined by the Company. above. The impact on the consolidated statement of • EIC Abstract 154, “Accounting for Pre-Existing earnings for the year ended December 31, 2005 was Relationships Between the Parties of a Business predominantly an increase in sales as quantified in Combination”, (“EIC 154”) issued on May 31, 2005, the table “Sales and Sales Growth Excluding Impact requires that a business combination between parties of VIEs” included on page 6. The impact on basic that have a pre-existing relationship be evaluated to net earnings per common share for 2005 was determine if a settlement of a pre-existing contract a decline of approximately 3 cents. has occurred which would require separate accounting The consolidation of these VIEs by the Company from the business combination. The settlement of does not result in any change to its tax, legal or credit the pre-existing contract should be measured at the risks nor does it result in the Company assuming any settlement amount as defined within the standard. obligations of these third parties. In addition, EIC 154 requires that certain reacquired rights, including the rights to the acquirer’s trade Independent Trust The Company has also identified that name under a franchise agreement, be recognized it holds a variable interest, by way of a standby letter as an intangible asset separate from goodwill. of credit, in an independent trust which is used to securitize credit card receivables for PC Bank. In these The Company has determined that acquisitions by the securitizations, PC Bank sells a portion of its credit Company of franchised, associated and independent card receivables to the independent trust in exchange stores are within the scope of EIC 154. The adoption for cash. Although this independent trust has been of EIC 154 by the Company on a prospective basis did identified as a VIE, it was determined that the Company not have a material impact on net earnings. is not the primary beneficiary and therefore this VIE 13.2 Future Accounting Standards is not subject to consolidation by the Company. The The Company closely monitors new accounting standards Company’s maximum exposure to loss as a result of its to assess the impact, if any, on its consolidated financial involvement with this independent trust is disclosed in statements. In 2006, the Company will be reviewing the Off-Balance Sheet Arrangements section of this the implications of the following standards and MD&A and in Notes 8 and 19 to the consolidated implementing the recommendations as required: financial statements. • In 2005, the Accounting Standards Board finalized its • EIC Abstract 150, “Determining Whether an strategic plan for financial reporting in Canada whereby Arrangement Contains a Lease”, (“EIC 150”) addresses Canadian GAAP will converge with International arrangements comprising a transaction or a series of Financial Reporting Standards over a five-year period. transactions that do not take the legal form of a lease After this transitional period, Canadian GAAP will but convey a right to use a tangible asset in return for cease to exist as a separate, distinct basis of financial a payment or a series of payments. EIC 150 provides reporting. The Company will continue to monitor guidance for determining whether these types of the changes resulting from this transition. arrangements contain a lease within the scope of Section 3065, “Leases”, and should be accounted 2005 Financial Report Loblaw Companies Limited 31 Management’s Discussion and Analysis

• EIC 156, “Accounting for Consideration by a Vendor and other events and circumstances from non-owner to a Customer (Including a Reseller of the Vendor’s sources and will include all changes in equity other Products)”, issued in September 2005 addresses cash than those resulting from investments by owners and consideration, including a sales incentive, given by a distributions to owners. vendor to a customer. This consideration is presumed These standards are effective for interim and annual to be a reduction of the selling price of the vendor’s financial statements for fiscal years beginning on products and should therefore be classified as a or after October 1, 2006. The Company is currently reduction of sales in the vendor’s income statement. assessing the impact of these recommendations These recommendations are effective for all interim and and will implement them in the first quarter of annual financial statements for fiscal years beginning 2007 prospectively. on or after January 1, 2006. The Company is currently assessing the impact of these recommendations and 14. Outlook will implement them in the first quarter of 2006. Loblaw continues to expect that the negative impact • Section 3855, “Financial Instruments – Recognition of its transformative process will be absorbed by the and Measurement”, Section 3865, “Hedges” end of the second quarter of 2006. This includes and Section 1530, “Comprehensive Income” issued in January 2005: an anticipated decline in adjusted basic net earnings per common share(1) in the first quarter of 2006 compared • Section 3855, “Financial Instruments – Recognition to the same period in 2005. This decline is expected and Measurement”, establishes standards for to be consistent with the relative decline in adjusted recognizing and measuring financial assets, financial basic net earnings per common share(1), experienced liabilities and non-financial derivatives. All financial in the fourth quarter of 2005. The Company expects instruments must be classified into a defined category, that adjusted basic net earnings per common namely, held-to-maturity investments, held for trading, share(1) performance will improve during the second loans and receivables, available-for-sale financial half of 2006. assets, and other liabilities. This classification will determine how each instrument is measured and The Company remains confident that its strategic plan how gains and losses are recognized. In addition, is appropriate given the increased competitive landscape. the recommendations define derivatives to include It believes that the transformation will provide the non-financial derivatives and embedded derivatives benefits of being a national organization while operating which meet certain criteria. All such derivatives locally in each community. Loblaw expects these must be classified as held for trading and therefore initiatives will better position the Company to meet recorded at fair value unless they are designated the food and everyday household needs of Canadian in a hedging relationship. consumers, and make the Company more aligned, streamlined and efficient so that it can continue to offer • Section 3865, “Hedges”, replaces AcG 13, customers the best value in the form of lower prices “Hedging Relationships” and the guidance formerly and better service. in Section 1650, “Foreign Currency Translation”. The recommendations of this section are optional Loblaw confirms its previously announced anticipated and are only required if the entity is applying hedge sales and earnings performance for the 2006 fiscal year. accounting. This section establishes standards It anticipates that sales growth, excluding variable for the accounting treatment of qualifying hedge interest entities, will be in the range of 3% to 6%, while relationships and the necessary disclosures. growth in adjusted basic net earnings per common share(1) will be in the range of 4% to 7%, as it enters • Section 1530, “Comprehensive Income”, introduces 2006 with confidence in its strategy. a statement of comprehensive income which will be included in the full set of interim and annual financial This outlook should be read in conjunction with the statements. Comprehensive income will represent Forward-Looking Statements section of this MD&A the change in equity during a period from transactions on page 2.

32 2005 Financial Report Loblaw Companies Limited (1) See Non-GAAP Financial Measures on page 33. 15. Non-GAAP Financial Measures implementation of AcG 15 retroactively without restatement effective January 2, 2005. These sales are The Company reports its financial results in accordance excluded because they affect the comparability of the with Canadian GAAP. However, the Company has financial results and could potentially distort the analysis included certain non-GAAP financial measures and of trends. A reconciliation of the financial measures to ratios which it believes provide useful information the Canadian GAAP financial measures is included in to both management and readers of this Annual Report, the “Sales and Sales Growth Excluding Impact of VIEs” including this Financial Report, in measuring the tables on pages 6 and 20 of this MD&A. financial performance and financial condition of the Company for the reasons set out below. These measures Adjusted Operating Income and Margin The following table do not have a standardized meaning prescribed by reconciles adjusted operating income to Canadian Canadian GAAP and, therefore, may not be comparable GAAP operating income reported in the consolidated to similarly titled measures presented by other publicly statements of earnings for the twelve week periods traded companies, nor should they be construed as ended December 31, 2005 and January 1, 2005 and the an alternative to other financial measures determined years ended as previously indicated. Items listed in the in accordance with Canadian GAAP. For the following reconciliation below are excluded because the Company tables, the annual non-GAAP financial measures for the believes this allows for a more effective analysis of years 2005 through to 2001, are for the 52 or 53 weeks the operating performance of the Company. In addition, ended or as at December 31, 2005; January 1, 2005; they affect the comparability of the financial results January 3, 2004; December 28, 2002 and and could potentially distort the analysis of trends. December 29, 2001, respectively. The exclusion of these items does not imply they are non-recurring. Adjusted operating income and margin Sales and Sales Growth Excluding Impact of VIEs These are useful to management in assessing the Company’s financial measures exclude the impact of the increase performance and in making decisions regarding the in sales from the consolidation by the Company of ongoing operations of its business. the independent franchisees which resulted from the

2005 2004 2005 2004 2003 2002 2001 ($ millions) (12 weeks) (12 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)

Operating income $ 394 $ 530 $ 1,401 $ 1,652 $ 1,467 $ 1,303 $ 1,136 Add (deduct) impact of the following: Net effect of stock-based compensation and the associated equity forwards 27 (8) 43 (4) 14 Restructuring and other charges 686 Goods and Services Tax and provincial sales taxes 40 Direct costs associated with supply chain disruptions 10 30 Variable interest entities 4 The Real Canadian Superstore labour arrangement 25

Adjusted operating income $ 441 $ 522 $ 1,600 $ 1,652 $ 1,488 $ 1,317 $ 1,136

Adjusted operating margin is calculated as adjusted operating income divided by sales excluding the impact of VIEs.

2005 Financial Report Loblaw Companies Limited 33 Management’s Discussion and Analysis

Adjusted EBITDA and Margin The following table reconciles ended December 31, 2005 and January 1, 2005 and adjusted earnings before interest, income taxes, the years ended as previously indicated. Adjusted EBITDA depreciation and amortization (“EBITDA”) to adjusted is useful to management in assessing the Company’s operating income which is reconciled to Canadian GAAP performance of its ongoing operations and its ability measures reported in the consolidated statements of to generate cash flows to fund its cash requirements, earnings, in the table above, for the twelve week periods including the Company’s capital investment program.

2005 2004 2005 2004 2003 2002 2001 ($ millions) (12 weeks) (12 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)

Adjusted operating income $ 441 $ 522 $ 1,600 $ 1,652 $ 1,488 $ 1,317 $ 1,136 Add (deduct) impact of the following: Depreciation and amortization 140 117 558 473 393 354 315 VIE depreciation and amortization (8) (26)

Adjusted EBITDA $ 573 $ 639 $ 2,132 $ 2,125 $ 1,881 $ 1,671 $ 1,451

Adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales excluding the impact of VIEs.

Adjusted Basic Net Earnings per Common Share The analysis of the operating performance of the Company. following table reconciles adjusted basic net earnings In addition, they affect the comparability of the financial per common share to Canadian GAAP basic net results and could potentially distort the analysis of earnings per common share measures reported in the trends. The exclusion of these items does not imply they consolidated statements of earnings for the twelve week are non-recurring. Adjusted basic net earnings per periods ended December 31, 2005 and January 1, 2005 common share is useful to management in assessing and the years ended as previously indicated. Items the Company’s performance and in making decisions listed in the reconciliation below are excluded because regarding the ongoing operations of its business. the Company believes this allows for a more effective

2005 2004 2005 2004 2003 2002 2001 (12 weeks) (12 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)

Basic net earnings per common share(1) $ .73 $ 1.23 $ 2.72 $ 3.53 $ 3.07 $ 2.64 $ 2.20 Add (deduct) impact of the following: Net effect of stock-based compensation and the associated equity forwards .15 (.06) .22 (.06) .04 Restructuring and other charges .01 .20 Goods and Services Tax and provincial sales taxes .10 Direct costs associated with supply chain disruptions .02 .07 Changes in statutory income tax rates in certain provinces .01 .01 .03 Variable interest entities .02 .03 Resolution of certain income tax matters (.05) The Real Canadian Superstore labour arrangement .06

Adjusted basic net earnings per common share $ .94 $ 1.17 $ 3.35 $ 3.48 $ 3.10 $ 2.68 $ 2.20

(1) 2001 basic net earnings per common share is before goodwill charges.

34 2005 Financial Report Loblaw Companies Limited Net Debt The following table reconciles net debt used in calculates net debt as the sum of long term debt and the net debt to equity ratio to Canadian GAAP measures short term debt less cash, cash equivalents and short reported in the consolidated balance sheets as at the term investments. The net debt to equity ratio is years ended as previously indicated. The Company useful in assessing the amount of leverage employed.

($ millions) 2005 2004 2003 2002 2001

Bank indebtedness $ 30 $ 28 $ 38 $ 95 Commercial paper 436 473 603 $ 533 191 Long term debt due within one year 161 216 106 106 81 Long term debt 4,194 3,935 3,956 3,420 3,333 Less: Cash and cash equivalents 916 549 618 823 575 Short term investments 4 275 378 304 426

Net debt $ 3,901 $ 3,828 $ 3,707 $ 2,932 $ 2,699

Total Assets The following table reconciles total assets assets ratio is useful in assessing the performance used in the return on average total assets to Canadian of its operating assets and therefore excludes cash, cash GAAP measures reported in the consolidated balance equivalents and short term investments from the total sheets as at the years ended as previously indicated. assets used in the ratio. The Company believes the return on average total

($ millions) 2005 2004 2003 2002 2001

Total asset s (1) $ 13,761 $ 12,949 $ 12,113 $ 11,047 $ 10,025 Less: Cash and cash equivalents 916 549 618 823 575 Short term investments 4 275 378 304 426

Total asset s $ 12,841 $ 12,125 $ 11,117 $ 9,920 $ 9,024

(1) Certain prior years’ information was reclassified to conform with the current year’s presentation.

16. Additional Information

Additional information has been filed electronically with various securities regulators in Canada through the System for Electronic Document Analysis and Retrieval (SEDAR) and is available online at www.sedar.com and with the Office of the Superintendent of Financial Institutions (OSFI) as the primary regulator for the Company’s subsidiary, President’s Choice Bank.

March 7, 2006 Toronto, Canada

2005 Financial Report Loblaw Companies Limited 35 Financial Results

37 Management’s Statement of Responsibility for Financial Reporting

37 Independent Auditors’ Report

38 Consolidated Statements of Earnings

38 Consolidated Statements of Retained Earnings

39 Consolidated Balance Sheets

40 Consolidated Cash Flow Statements

41 Notes to the Consolidated Financial Statements 41 Note 1. Summary of Significant Accounting Policies 45 Note 2. Variable Interest Entities 47 Note 3. Restructuring and Other Charges 48 Note 4. Goods and Services Tax and Provincial Sales Taxes 49 Note 5. Interest Expense 49 Note 6. Basic and Diluted Net Earnings per Common Share 49 Note 7. Cash, Cash Equivalents and Short Term Investments 49 Note 8. Credit Card Receivables 51 Note 9. Income Taxes 52 Note 10. Fixed Assets 52 Note 11. Goodwill 53 Note 12. Other Assets 53 Note 13. Employee Future Benefits 57 Note 14. Long Term Debt 58 Note 15. Other Liabilities 59 Note 16. Common Share Capital 59 Note 17. Stock-Based Compensation 61 Note 18. Financial Instruments 63 Note 19. Contingencies, Commitments and Guarantees 64 Note 20. Related Party Transactions 65 Note 21. Other Information

66 Five Year Summary

68 Glossary of Terms

36 2005 Financial Report Loblaw Companies Limited Management’s Statement of Responsibility for Financial Reporting

The management of Loblaw Companies Limited is responsible for the preparation, presentation and integrity of the accompanying consolidated financial statements, Management’s Discussion and Analysis and all other information in the Annual Report. This responsibility includes the selection and consistent application of appropriate accounting principles and methods in addition to making the judgments and estimates necessary to prepare the consolidated financial statements in accordance with Canadian generally accepted accounting principles. It also includes ensuring that the financial information presented elsewhere in the Annual Report is consistent with that in the consolidated financial statements. To provide reasonable assurance that assets are safeguarded and that relevant and reliable financial information is produced, management maintains a system of internal controls reinforced by the Company’s Code of Business Conduct. Internal auditors, who are employees of the Company, review and evaluate internal controls on management’s behalf, coordinating this work with the independent auditors. KPMG LLP, whose report follows, were appointed as independent auditors by a vote of the Company’s shareholders to audit the consolidated financial statements. The Board of Directors, acting through an Audit Committee comprised solely of directors who are independent of the Company, is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated financial statements and the financial control of operations. The Audit Committee recommends the independent auditors for appointment by the shareholders. The Audit Committee meets regularly with senior and financial management, internal auditors and the independent auditors to discuss internal controls, auditing activities and financial reporting matters. The independent auditors and internal auditors have unrestricted access to the Audit Committee. These consolidated financial statements and Management’s Discussion and Analysis have been approved by the Board of Directors for inclusion in the Annual Report based on the review and recommendation of the Audit Committee. Toronto, Canada March 7, 2006

John A. Lederer Richard P. Mavrinac Stephen A. Smith President Executive Vice President Executive Vice President

Independent Auditors’ Report

To the Shareholders of Loblaw Companies Limited: We have audited the consolidated balance sheets of Loblaw Companies Limited as at December 31, 2005 and January 1, 2005 and the consolidated statements of earnings, retained earnings and cash flow for the 52 week years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and January 1, 2005 and the results of its operations and its cash flow for the years then ended in accordance with Canadian generally accepted accounting principles.

Toronto, Canada March 7, 2006 Chartered Accountants

2005 Financial Report Loblaw Companies Limited 37 Consolidated Statements of Earnings

For the years ended December 31, 2005 and January 1, 2005 2005 2004 ($ millions except where otherwise indicated) (52 weeks) (52 weeks) Sales $ 27,801 $ 26,209 Operating Expenses Cost of sales, selling and administrative expenses 25,716 24,084 Depreciation and amortization 558 473 Restructuring and other charges (note 3) 86 Goods and Services Tax and provincial sales taxes (note 4) 40 26,400 24,557 Operating Income 1,401 1,652 Interest Expense (note 5) 252 239 Earnings before Income Taxes 1,149 1,413 Income Taxes (note 9) 400 445 Net Earnings before Minority Interest 749 968 Minority Interest 3 Net Earnings $ 746 $ 968

Net Earnings per Common Share ($) (note 6) Basic $ 2.72 $3.53 Diluted $ 2.71 $3.51

See accompanying notes to the consolidated financial statements.

Consolidated Statements of Retained Earnings

For the years ended December 31, 2005 and January 1, 2005 2005 2004 ($ millions except where otherwise indicated) (52 weeks) (52 weeks) Retained Earnings, Beginning of Year as Previously Reported $ 4,222 $ 3,496 Impact of implementing new accounting standard (note 2) (29) Retained Earnings, Beginning of Year Restated 4,193 3,496 Net earnings 746 968 Premium on common shares purchased for cancellation (note 16) (15) (33) Dividends declared per common share – 84¢ (2004 – 76¢) (230) (209) Retained Earnings, End of Year $ 4,694 $ 4,222

See accompanying notes to the consolidated financial statements.

38 2005 Financial Report Loblaw Companies Limited Consolidated Balance Sheets

As at December 31, 2005 and January 1, 2005 ($ millions) 2005 2004 Assets Current Assets Cash and cash equivalents (note 7) $ 916 $ 549 Short term investments (note 7) 4 275 Accounts receivable (note 8) 656 665 Inventories 2,020 1,821 Income taxes 3 Future income taxes (note 9) 72 81 Prepaid expenses and other assets 30 32 Total Current Assets 3,701 3,423 Fixed Assets (note 10) 7,785 7,113 Goodwill (note 11) 1,587 1,621 Other Assets (note 12) 688 792 Total Assets $ 13,761 $ 12,949 Liabilities Current Liabilities Bank indebtedness $30 $28 Commercial paper 436 473 Accounts payable and accrued liabilities 2,535 2,307 Income taxes 109 Long term debt due within one year (note 14) 161 216 Total Current Liabilities 3,162 3,133 Long Term Debt (note 14) 4,194 3,935 Future Income Taxes (note 9) 237 184 Other Liabilities (note 15) 271 283 Minority Interest 11 Total Liabilities 7,875 7,535 Shareholders’ Equity Common Share Capital (note 16) 1,192 1,192 Retained Earnings 4,694 4,222 Total Shareholders’ Equity 5,886 5,414 Total Liabilities and Shareholders’ Equity $ 13,761 $ 12,949

See accompanying notes to the consolidated financial statements.

Approved on Behalf of the Board

W. Galen Weston Thomas C. O’Neill Director Director

2005 Financial Report Loblaw Companies Limited 39 Consolidated Cash Flow Statements

For the years ended December 31, 2005 and January 1, 2005 2005 2004 ($ millions) (52 weeks) (52 weeks) Operating Activities Net earnings before minority interest $ 749 $ 968 Depreciation and amortization 558 473 Restructuring and other charges (note 3) 86 Goods and Services Tax and provincial sales taxes (note 4) 40 Future income taxes 90 67 Change in non-cash working capital (51) (99) Other 17 34 Cash Flows from Operating Activities 1,489 1,443 Investing Activities Fixed asset purchases (1,156) (1,258) Short term investments 271 83 Proceeds from fixed asset sales 109 110 Credit card receivables, after securitization (note 8) (84) (34) Franchise investments and other receivables 53 (26) Other (96) (52) Cash Flows used in Investing Activities (903) (1,177) Financing Activities Bank indebtedness (17) (11) Commercial paper (37) (130) Long term debt (note 14) Issued 333 200 Retired (240) (103) Common share capital Issued (notes 16 and 17) 1 Retired (note 16) (16) (35) Dividends (230) (209) Other (2) (2) Cash Flows used in Financing Activities (208) (290) Effect of foreign currency exchange rate changes on cash and cash equivalents (note 7) (31) (45) Initial impact of variable interest entities (note 2) 20 Change in Cash and Cash Equivalents 367 (69) Cash and Cash Equivalents, Beginning of Year 549 618 Cash and Cash Equivalents, End of Year $ 916 $ 549

See accompanying notes to the consolidated financial statements.

40 2005 Financial Report Loblaw Companies Limited Notes to the Consolidated Financial Statements

For the years ended December 31, 2005 and January 1, 2005 ($ millions except where otherwise indicated)

Note 1. Summary of Significant Accounting Policies

The consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).

Basis of Consolidation The consolidated financial statements include the accounts of Loblaw Companies Limited and its subsidiaries, collectively referred to as the “Company” or “Loblaw”. The Company’s interest in the voting share capital of its subsidiaries is 100%. Effective January 2, 2005, the Company was required, pursuant to Accounting Guideline 15, “Consolidation of Variable Interest Entities”, (“AcG 15”) issued by the Canadian Institute of Chartered Accountants (“CICA”), to consolidate certain variable interest entities (“VIEs”) that are subject to control on a basis other than through ownership of a majority of voting interest.

Additional disclosure regarding the implementation of AcG 15 is provided in Note 2.

Fiscal Year The fiscal year of the Company ends on the Saturday closest to December 31. As a result, the Company’s fiscal year is usually 52 weeks in duration but includes a 53rd week every 5 to 6 years. The years ended December 31, 2005 and January 1, 2005 each contained 52 weeks.

Revenue Recognition Sales include revenues, net of returns, from customers through corporate stores operated by the Company and independent franchisee stores that are consolidated by the Company pursuant to AcG 15. In addition, sales include sales to and service fees from associated stores and independent account customers and franchised stores excluding VIE stores. The Company recognizes revenue at the time the sale is made to its customers.

Earnings per Share (“EPS”) Basic EPS is calculated by dividing the net earnings available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated using the treasury stock method, which assumes that all outstanding stock options with an exercise price below the average market price are exercised and the assumed proceeds are used to purchase the Company’s common shares at the average market price during the year.

Cash, Cash Equivalents and Bank Indebtedness Cash balances which the Company has the ability and intent to offset are used to reduce reported bank indebtedness. Cash equivalents are highly liquid investments with a maturity of 90 days or less.

Short Term Investments Short term investments are carried at the lower of cost or quoted market value and consist primarily of United States government securities, commercial paper and bank deposits.

Credit Card Receivables The Company, through President’s Choice Bank (“PC Bank”), a wholly owned subsidiary of the Company, has credit card receivables that are stated net of an allowance for credit losses. Credit card receivables, if contractually past due, are not classified as impaired but are fully written off the earlier of when payments are contractually 180 days in arrears or when the likelihood of collection is considered remote. Interest income on credit card receivables is recorded on an accrual basis and is recognized in operating income.

Allowance for Credit Losses PC Bank maintains a general allowance for probable credit losses on aggregate exposures for which losses cannot be determined on an item-by-item basis. The allowance is based upon a statistical analysis of past performance, the level of allowance already in place and management’s judgment. The allowance for credit losses is deducted from the credit card receivables balance. The net credit loss experience for the year is recognized in operating income.

2005 Financial Report Loblaw Companies Limited 41 Notes to the Consolidated Financial Statements

Securitization PC Bank securitizes credit card receivables through the sale of a portion of the total interest in these receivables to an independent trust and does not exercise any control over the trust’s management, administration or assets. When PC Bank sells credit card receivables in a securitization transaction, it has a retained interest in the securitized receivables represented by the right to future cash flows after obligations to investors have been met. Although PC Bank remains responsible for servicing all credit card receivables, it does not receive additional compensation for servicing those credit card receivables sold to the trust. Any gain or loss on the sale of these receivables depends, in part, on the previous carrying amount of receivables involved in the securitization, allocated between the receivables sold and the retained interest, based on their relative fair values at the date of securitization. The fair values are determined using a financial model. Any gain or loss on a sale is recognized in operating income at the time of the securitization. The carrying value of retained interests is periodically reviewed and when a decline in value is identified that is other than temporary, the carrying value is written down to fair value.

Vendor Allowances The Company receives allowances from certain of its vendors whose products it purchases for resale. These allowances are received for a variety of buying and/or merchandising activities, including vendor programs such as volume purchase allowances, purchase discounts, listing fees and exclusivity allowances. Consideration received from a vendor is a reduction in the cost of the vendor’s products or services and is recognized as a reduction in the cost of sales and the related inventory when recognized in the income statement and balance sheet. Certain exceptions apply if the consideration is a payment for assets or services delivered to the vendor or for reimbursement of selling costs incurred to promote the vendor’s products, provided that certain conditions are met.

Inventories Retail store inventories are stated at the lower of cost and estimated net realizable value less normal gross profit margin. Wholesale and seasonal general merchandise inventories are stated at the lower of cost and estimated net realizable value. Cost is determined substantially using the first-in, first-out method.

Fixed Assets Fixed assets are recorded at cost including capitalized interest. Depreciation commences when the assets are put into use and is recognized on a straight-line basis to depreciate the cost of these assets over their estimated useful lives. Estimated useful lives range from 20 to 40 years for buildings, 10 years for building improvements and from 3 to 10 years for equipment and fixtures. Leasehold improvements are depreciated over the lesser of their estimated useful lives and the term of the lease, plus renewal options when applicable, to a maximum of 10 years.

Fixed assets are reviewed for impairment when events or circumstances indicate that the carrying value exceeds the sum of the undiscounted future cash flows expected from use and eventual disposal. Fixed assets are also reviewed for impairment annually. For purposes of annually reviewing store assets for impairment, asset groups are reviewed at their lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. Therefore, store net cash flows are grouped together by primary market areas, where cash flows are largely dependent on each other. Primary markets are regional areas where a number of store formats operate within close proximity to one another. If an indicator of impairment exists, such as sustained negative operating cash flows of the respective asset group, then an estimate of undiscounted future cash flows of each such store within this group is prepared and compared to its carrying value. For purposes of annually reviewing distribution centre assets for impairment, distribution centre net cash flows are grouped with the respective net cash flows of the stores they service. An impairment in the store network serviced by the distribution centre would indicate an impairment in the distribution centre assets as well. If these assets are determined to be impaired, the impairment loss is measured as the excess of the carrying value over fair value. In addition, the carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. These events or changes in circumstances include a commitment to close a store or distribution centre or to relocate or convert a store where the carrying value of its assets is greater than the expected undiscounted future cash flows.

42 2005 Financial Report Loblaw Companies Limited Deferred Charges Debt issue costs associated with long term debt are deferred and amortized on a straight-line basis over the term of the debt. Other deferred charges are amortized over the related assets’ estimated useful lives, to a maximum of 15 years.

Goodwill Goodwill represents the excess of the purchase price of a business acquired over the fair value of the underlying net assets acquired at the date of acquisition. Goodwill is not amortized and its carrying value is tested at least annually for impairment. Any impairment in the carrying value of goodwill is recognized in operating income.

Financial Derivative Instruments The Company uses financial derivative agreements in the form of cross currency basis swaps, interest rate swaps and equity forwards to manage its current and anticipated exposure to fluctuations in foreign currency exchange rates, interest rates and the market price of the Company’s common shares. The Company does not enter into financial derivative agreements for trading or speculative purposes.

The Company formally identifies, designates and documents the relationships between hedging instruments and hedged items including cross currency basis swaps and interest rate swaps as cash flow hedges against its exposure to fluctuations in the foreign currency exchange rate and variable interest rates on a portion of its United States dollar denominated assets, principally cash equivalents and short term investments; and interest rate swaps as a cash flow hedge of the variable interest rate exposure on commercial paper. Effectiveness tests are performed to evaluate hedge effectiveness at inception and on an ongoing basis, both retrospectively and prospectively.

Realized and unrealized foreign currency exchange rate adjustments on cross currency basis swaps are offset by realized and unrealized foreign currency exchange rate adjustments on a portion of the Company’s United States dollar denominated assets and are recognized in operating income. The cumulative unrealized foreign currency exchange rate receivable or payable is recorded in other assets or other liabilities, respectively. The exchange of interest payments on the cross currency basis swaps and interest rate swaps is recognized on an accrual basis in interest expense. Unrealized gains or losses on the interest rate swaps designated within an effective hedging relationship are not recognized.

Financial derivative instruments not designated within an effective hedging relationship are measured at fair value with changes in fair value recorded in interest expense.

During 2005, an electricity forward contract expired which had been designated as a cash flow hedge of price volatility of the Company’s electricity costs in Ontario, Canada. Prior to its expiry, gains and losses on this electricity forward contract were recognized in operating income as actual electricity costs were recognized.

Equity forwards are used to manage exposure to fluctuations in the Company’s stock-based compensation cost because they change in value as the market price of the underlying common shares changes. The market price adjustments on the equity forwards are recognized in operating income as gains or losses and the cumulative unrealized gains or losses are recorded in other assets or other liabilities, respectively. Interest on the equity forwards is recognized on an accrual basis in interest expense.

Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the foreign currency exchange rate in effect at the balance sheet date. Exchange gains or losses arising from the translation of these balances denominated in foreign currencies are recognized in operating income. Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at the average foreign currency exchange rate for the year.

Income Taxes The asset and liability method of accounting is used for income taxes. Under the asset and liability method, future income tax assets and liabilities are recognized for the future income tax consequences attributable to temporary differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are

2005 Financial Report Loblaw Companies Limited 43 Notes to the Consolidated Financial Statements

expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in income tax rates is recognized in income tax expense when enacted or substantively enacted. Future income tax assets are evaluated and a valuation allowance, if required, is recorded against any future income tax asset if it is more likely than not that the asset will not be realized.

Employee Future Benefits The cost and accrued benefit plan obligations of the Company’s defined benefit pension plans and other benefit plans, which include post-retirement, post-employment and long term disability benefits, are accrued based on actuarial valuations. The actuarial valuations are determined using the projected benefit method prorated on service and management’s best estimate of the expected long term rate of return on plan assets, rate of compensation increase, retirement ages and expected growth rate of health care costs. Actuarial valuations are performed using a September 30 measurement date for accounting purposes. Market values used to value benefit plan assets are as at the measurement date. The accrued benefit plan obligation is measured using market interest rates as at the measurement date, assuming a portfolio of Corporate AA bonds with terms to maturity that, on average, match the terms of the accrued benefit plan obligation.

The cost of plan amendments and the excess unamortized net actuarial gain or loss over 10% of the greater of the accrued benefit plan obligation or the fair value of the benefit plan assets at the beginning of the year are amortized over the expected average remaining service period of the active employees. The expected average remaining service period of the active employees covered by the defined benefit pension plans ranges from 6 to 17 years with a weighted average of 13 years. The expected average remaining service period of the employees covered by the other benefit plans ranges from 7 to 13 years with a weighted average of 11 years.

The cost of pension benefits for defined contribution pension plans and multi-employer pension plans are expensed as contributions are paid.

The accrued benefit plan asset or liability represents the cumulative difference between the cost and the funding contributions and is recorded in other assets and other liabilities.

Stock Option Plan The Company recognizes a compensation cost in operating income and a liability related to employee stock options that allow for settlement in shares or in the share appreciation value in cash at the option of the employee, using the intrinsic value method. Under the intrinsic value method, the stock-based compensation liability is the amount by which the market price of the common shares exceeds the exercise price of the stock options. A year-over-year change in the stock-based compensation liability is recognized in operating income on a prescribed vesting basis.

The Company accounts for stock options issued prior to December 30, 2001 that will be settled by issuing common shares as capital transactions. Consideration paid by employees on the exercise of this type of stock option is credited to common share capital. This type of option was last issued in 2001 and represents approximately 2.9% of all options outstanding at year end.

Restricted Share Unit (“RSU”) Plan The Company recognizes a compensation cost in operating income for each RSU granted equal to the market value of a Loblaw common share at the date on which RSUs are awarded to each participant prorated over the performance period and adjusts for changes in the market value until the end of the performance date. The cumulative effect of the change in market value is recognized in operating income in the period of change.

Employee Share Ownership Plan The Company maintains an Employee Share Ownership Plan which allows employees to acquire the Company’s common shares through regular payroll deductions of up to 5% of their gross regular earnings. The Company contributes an additional 25% (2004 – 15%) of each employee’s contribution to the plan, which is recognized in operating income as a compensation cost when the contribution is made.

44 2005 Financial Report Loblaw Companies Limited Deferred Share Units Members of the Company’s Board of Directors may elect annually to receive all or a portion of their annual retainer(s) and fees in the form of deferred share units, which are accounted for using the intrinsic value method. Under the intrinsic value method, the deferred share unit compensation liability is the amount by which the market price of the common shares exceeds the initial value of the deferred share unit. The year-over-year change in the deferred share units liability is recognized in operating income as a compensation cost.

Use of Estimates and Assumptions The preparation of the consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes. These estimates and assumptions are based on management’s historical experience, best knowledge of current events and conditions and activities that may be undertaken in the future. Actual results could differ from these estimates.

Certain estimates, such as those related to valuation of inventories, goodwill, income taxes, Goods and Services Tax and provincial sales taxes and employee future benefits, depend upon subjective or complex judgments about matters that may be uncertain, and changes in those estimates could materially impact the consolidated financial statements.

Comparative Information Certain prior year’s information was reclassified to conform with the current year’s presentation.

Note 2. Variable Interest Entities

Effective January 2, 2005, the Company implemented AcG 15, retroactively without restatement of prior periods and as a result, the Company consolidates entities in which it has control through ownership of a majority of the voting interests as well as all VIEs for which it is the primary beneficiary.

AcG 15 defines a variable interest entity as an entity that either does not have sufficient equity at risk to finance its activities without subordinated financial support or where the holders of the equity at risk lack the characteristics of a controlling financial interest. AcG 15 requires the primary beneficiary to consolidate VIEs and considers an entity to be the primary beneficiary of a VIE if it holds variable interests that expose it to a majority of the VIE’s expected losses or that entitle it to receive a majority of the VIE’s expected residual returns or both.

Upon implementation of AcG 15, the Company identified the following significant VIEs:

Independent Franchisees The Company enters into various forms of franchise agreements that generally require the independent franchisee to purchase inventory from the Company and pay certain fees in exchange for services provided by the Company and for the right to use certain trademarks and licences owned by the Company. Independent franchisees generally lease the land and building from the Company, and when eligible, may obtain financing through a structure involving independent trusts to facilitate the purchase of the majority of their inventory and fixed assets, consisting mainly of fixturing and equipment. These trusts are administered by a major Canadian bank. Under the terms of certain franchise agreements, the Company may also lease equipment to independent franchisees. Independent franchisees may also obtain financing through operating lines of credit with traditional financial institutions or through issuing preferred shares or notes payable to the Company. The Company monitors the financial condition of its independent franchisees and provides for estimated losses or write-downs on its accounts and notes receivable or investments when appropriate. Upon implementation of AcG 15, the Company determined that 121 of its independent franchisee stores met the criteria for VIEs that require consolidation by the Company pursuant to AcG 15.

2005 Financial Report Loblaw Companies Limited 45 Notes to the Consolidated Financial Statements

Warehouse and Distribution Agreement The Company has entered into a warehousing and distribution agreement with a third party to provide to the Company distribution and warehousing services from a dedicated facility. The Company has no equity interest in this third party; however, the terms of the agreement with the third party are such that the Company has determined that the third party meets the criteria for a VIE that requires consolidation by the Company. As a result of the fee structure agreed to with this third party, the impact of the consolidation of the warehouse and distribution entity was not material.

Accordingly, the Company has included the results of these independent franchisees and this third-party entity that provides distribution and warehousing services in its consolidated financial statements effective January 2, 2005.

Details of the amounts recorded upon implementation and the effect on the opening consolidated balance sheet as at January 2, 2005 are summarized below and include the impact of both the independent franchisees and the warehouse and distribution entity:

Condensed Consolidated Balance Sheet as at January 2, 2005

Condensed consolidated Impact of the Condensed consolidated balance sheet before implementation balance sheet after AcG 15 impact of AcG 15 AcG 15 impact Cash and cash equivalents $ 549 $ 20 $ 569 Short term investments 275 275 Accounts receivable 665 (73) 592 Inventories 1,821 78 1,899 Other current assets 113 4 117 Total current assets 3,423 29 3,452 Fixed assets 7,113 136 7,249 Goodwill 1,621 3 1,624 Other assets 792 (51) 741 Total asset s $ 12,949 $ 117 $ 13,066 Total current liabilities $ 3,133 $ 48 $ 3,181 Long term debt 3,935 96 4,031 Other liabilities 467 (8) 459 Minority interest 10 10 Total liabilities 7,535 146 7,681 Common share capital 1,192 1,192 Retained earnings 4,222 (29) 4,193 Total liabilities and shareholders’ equity $ 12,949 $ 117 $ 13,066

The impact of AcG 15 on the opening consolidated balance sheet can be further explained as follows:

• An after-tax, one-time charge of $29 (net of income taxes of $12) was recorded upon implementation and resulted mainly from delaying the recognition of vendor monies to when the related inventories of the independent franchisees are sold to their customers, the excess of the independent franchisees’ accumulated losses over the allowance for doubtful accounts previously recorded by the Company and the reversal of initial franchise fees initially recognized upon the sale of franchises to third parties.

46 2005 Financial Report Loblaw Companies Limited • Accounts receivable due from the independent franchisees and the investment in preferred shares of the independent franchisees were eliminated upon consolidation; cash and cash equivalents, inventories and fixed assets financed by long term debt (a portion of which is due within one year) were recorded. • An increase in fixed assets and total current liabilities in respect of the warehouse and distribution entity. • Minority interest representing the common stakeholder’s equity in the respective VIEs.

As at December 31, 2005, 123 of the Company’s independent franchise stores met the criteria for a VIE and were consolidated pursuant to AcG 15.

The impact from the consolidation of these VIEs on the consolidated balance sheet as at December 31, 2005 was not significantly different than the impact on the opening consolidated balance sheet as outlined above. The impact on the consolidated statement of earnings for the year ended December 31, 2005 was predominantly an increase in sales of 1.5%. The impact on basic net earnings per common share for 2005 was a decline of approximately 3 cents.

The consolidation of these VIEs by the Company does not result in any change to its tax, legal or credit risks nor does it result in the Company assuming any obligations of these third parties.

Independent Trust The Company has also identified that it holds a variable interest, by way of a standby letter of credit, in an independent trust which is used to securitize credit card receivables for PC Bank. In these securitizations, PC Bank sells a portion of its credit card receivables to the independent trust in exchange for cash. Although this independent trust has been identified as a VIE, it was determined that the Company is not the primary beneficiary and therefore this VIE is not subject to consolidation by the Company. The Company’s maximum exposure to loss as a result of its involvement with this independent trust is disclosed in Notes 8 and 19.

Note 3. Restructuring and Other Charges

During 2005, after completion of a detailed assessment of its supply chain network, management of the Company approved a comprehensive plan to restructure its supply chain operations nationally. This plan is expected to reduce future operating costs, provide a smoother flow of products and better service levels to stores and further enable the Company to achieve its targeted operating efficiencies. The plan involves the closure of six distribution centres and the relocation of certain activities to new distribution centres. The transfer of the distribution activities of general merchandise to a new facility owned and operated by a third party in Pickering, Ontario was substantially completed by the end of 2005. In addition, a new distribution centre dedicated to food distribution is expected to open in late 2007 or early 2008 in Ajax, Ontario. As a result of these initiatives, it is expected that approximately 1,400 positions will be affected within the supply chain network. The restructuring plan is expected to be completed by late 2007 or early 2008 and the total restructuring cost under this plan is estimated to be approximately $90. Of the $90 total estimated cost, approximately $57 is attributable to employee termination benefits which include severance and additional pension costs resulting from the termination of employees, $13 to fixed asset impairment and accelerated depreciation of assets relating to this restructuring activity and $20 to site closing and other costs directly attributable to the restructuring plan. In 2005, the Company recognized $62 of restructuring costs resulting from this plan.

In addition, the Company consolidated several administrative and operating offices from across southern Ontario into a new national head office and Store Support Centre in Brampton, Ontario and reorganized the merchandising, procurement and operations groups which included the transfer of the general merchandise operations from Calgary, Alberta to the new office. The charge recognized in 2005 was $24. These restructuring activities were substantially completed by the end of 2005.

2005 Financial Report Loblaw Companies Limited 47 Notes to the Consolidated Financial Statements

The following table provides a summary of the costs recognized and cash payments made in 2005, as well as the corresponding net liability as at December 31, 2005:

Site Fixed Asset Employee Closing Total Impairment and Termination Costs and Net Accelerated Benefits Other Liability Depreciation Total Costs recognized in 2005: Supply chain network $45 $ 6 $51 $11 $62 Office move and reorganization of the operation support functions 6 15 21 3 24 $51 $21 $72 $14 $86 Cash payments during 2005: Supply chain network $7 $6 $13 Office move and reorganization of the operation support functions 31518 $10 $21 $31 Net liability as at December 31, 2005 $41 $ – $41 Recorded in the consolidated balance sheet as follows: Other assets(1) (note 13) $9 $9 Accounts payable and accrued liabilities 77 Other liabilities (note 15) 25 25 Net liability as at December 31, 2005 $41 $41

(1) Represents defined benefit pension plan costs applied to other assets.

Note 4. Goods and Services Tax (“GST”) and Provincial Sales Taxes (“PST”)

During 2005, a charge was recorded relating to an audit and proposed assessment by the Canada Revenue Agency relative to GST on certain products sold between 2000 and 2002 on which GST was not appropriately charged and remitted. In light of this proposed assessment, the Company assessed and estimated the potential liabilities for GST and PST in other areas of its operations for various periods up to the end of 2004. Accordingly, a charge of $40 was recorded in operating income in the third quarter to reflect management’s best estimate of such potential tax liabilities of which management is currently aware. Approximately $15 of this amount was settled during the fourth quarter. The ultimate remaining amount paid will depend on the outcome of audits performed by, or settlements reached with the various tax authorities and therefore may differ from this estimate. Management will continue to assess the remaining accrual as progress towards resolution with the various tax authorities is made and will adjust the remaining accrual accordingly.

48 2005 Financial Report Loblaw Companies Limited Note 5. Interest Expense

2005 2004 Interest on long term debt $ 290 $ 290 Interest on financial derivative instruments (6) (30) Net short term interest (11) Capitalized to fixed assets (21) (21) Interest expense $ 252 $ 239

Net interest paid in 2005 was $263 (2004 – $254).

Note 6. Basic and Diluted Net Earnings per Common Share

2005 2004 Net earnings $ 746 $ 968

Weighted average common shares outstanding (in millions) 274.2 274.3 Dilutive effect of stock-based compensation (in millions) 0.8 1.6

Diluted weighted average common shares outstanding (in millions) 275.0 275.9

Basic net earnings per common share ($) $ 2.72 $3.53 Dilutive effect of stock-based compensation per common share ($) (0.01) (0.02)

Diluted net earnings per common share ($) $ 2.71 $3.51

At the end of 2005, there were 2,254,639 stock options outstanding with a weighted average exercise price of $69.578 per common share that were not recognized in the computation of diluted net earnings per common share because the exercise prices of the options were greater than the average market price of the common shares for 2005.

Note 7. Cash, Cash Equivalents and Short Term Investments

At year end, the Company had $837 (2004 – $819) in cash, cash equivalents and short term investments held by Glenhuron Bank Limited (“Glenhuron”), a wholly owned subsidiary of the Company in Barbados. The $27 (2004 – $14) of income from cash, cash equivalents and short term investments was recognized in net short term interest.

The Company recognized an unrealized foreign currency exchange rate loss of $31 (2004 – $65) as a result of translating its United States dollar denominated cash, cash equivalents and short term investments, of which $31 (2004 – $45) related to cash and cash equivalents. The resulting loss on cash, cash equivalents and short term investments is offset in operating income by the unrealized foreign currency exchange rate gain on the cross currency basis swaps. A cumulative unrealized foreign currency exchange rate receivable of $168 (2004 – $155) relating to these swaps is recorded in other assets on the balance sheet.

Note 8. Credit Card Receivables

The Company, through PC Bank, securitizes credit card receivables through the sale of a portion of the total interest in these receivables to an independent trust and does not exercise any control over the trust’s management, administration or assets. When PC Bank sells credit card receivables in a securitization transaction, it has a retained interest in the securitized receivables represented by the right to future cash flows after obligations to investors have been met. Although PC Bank remains responsible for servicing all credit card receivables, it does not receive additional compensation for servicing those credit card receivables sold to the trust.

2005 Financial Report Loblaw Companies Limited 49 Notes to the Consolidated Financial Statements

During 2005, $225 (2004 – $227) of credit card receivables were securitized, through the sale of a portion of the total interest in these receivables to an independent trust yielding a nominal net loss (2004 – nominal net gain) on the initial sale inclusive of a $1 (2004 – $1) servicing liability. Servicing liabilities expensed during the year were $13 (2004 – $11) and the fair value at year end of recognized servicing liabilities was $8 (2004 – $7). The trust’s recourse to PC Bank’s assets is limited to PC Bank’s retained interests and is further supported by the Company through a standby letter of credit for 9% (2004 – 15%) of the securitized amount.

2005 2004 Credit card receivables $ 1,257 $ 950 Amount securitized (1,010) (785) Net credit card receivables $ 247 $ 165 Net credit loss experience $5 $4

The net credit loss experience of $5 (2004 – $4) includes $33 (2004 – $23) of credit losses on the total portfolio of credit card receivables net of credit losses of $28 (2004 – $19) relating to securitized credit card receivables. The following table outlines the key economic assumptions used in measuring the retained interests at the date of securitization for securitizations completed in 2005. The table also displays the sensitivity of the current fair value of retained interests to an immediate 10% and 20% adverse change in the 2005 key economic assumptions. The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of each key assumption have been calculated independently of any changes in other key assumptions. Actual experience may result in changes in a number of key assumptions simultaneously. Changes in one factor may result in changes in another, which could amplify or reduce the impact of such assumptions.

Change in Assumptions 2005 10% 20% Carrying value of retained interests $5 Payment rate (monthly) 46.0% Weighted average life (years) 0.6 Expected credit losses (annual) 3.0% $ (0.5) $ (1.0) Discount rate applied to residual cash flows (annual) 14.0% $ (1.6) $ (3.1)

The details on the cash flows from securitization are as follows:

2005 2004 Proceeds from new securitizations $ 225 $ 227 Net cash flows received on retained interests $ 106 $83

In October 2005, Eagle Credit Card Trust (“Eagle”), an independent trust, was established for the purpose of issuing notes backed by credit card receivables originated and serviced by PC Bank. Subsequent to year end, Eagle issued $500, five year notes at a weighted average rate of 4.5%, due 2011, to finance the purchase of credit card receivables previously securitized by PC Bank, from an independent trust. PC Bank will continue to service the credit card receivables on behalf of Eagle, but will not receive any fee for its servicing obligations and has a retained interest in the securitized receivables represented by the right to future cash flows after obligations to investors have been met. In accordance with Canadian GAAP, the financial statements of Eagle will not be consolidated with those of the Company.

50 2005 Financial Report Loblaw Companies Limited Note 9. Income Taxes

The effective income tax rate in the consolidated statements of earnings is reported at a rate different than the weighted average basic Canadian federal and provincial statutory income tax rate for the following reasons:

2005 2004 Weighted average basic Canadian federal and provincial statutory income tax rate 34.4% 34.9% Net increase (decrease) resulting from: Earnings in jurisdictions taxed at rates different from the Canadian statutory income tax rates 0.5 (2.0) Non-taxable amounts (0.7) (0.7) Large corporation tax 0.5 0.7 Impact of statutory income tax rate changes on future income tax balances 0.3 Impact of successful resolution of certain income tax matters from a previous year and other (0.2) (1.4) Effective income tax rate 34.8% 31.5%

Net income taxes paid in 2005 were $387 (2004 – $400).

Future income tax balances were adjusted for statutory income tax rate changes in certain provinces, in 2005, resulting in a $3 charge to future income tax expense. In 2004, the Company recognized a $14 reduction to the income tax expense as a result of the successful resolution of certain income tax matters from a previous year.

The income tax effects of temporary differences that gave rise to significant portions of the future income tax assets (liabilities) were as follows:

2005 2004 Accounts payable and accrued liabilities $55 $56 Other liabilities 86 90 Fixed assets (278) (222) Other assets (64) (55) Other 36 28 Net future income tax liabilities $ (165) $ (103)

2005 2004 Recorded in the consolidated balance sheets as follows: Current future income tax assets $72 $81 Non-current future income tax liabilities (237) (184) Net future income tax liabilities $ (165) $ (103)

2005 Financial Report Loblaw Companies Limited 51 Notes to the Consolidated Financial Statements

Note 10. Fixed Assets

2005 2004

Accumulated Net Book Accumulated Net Book Cost Depreciation Value Cost Depreciation Value Properties held for development $ 442 $ 442 $ 378 $ 378 Properties under development 231 231 290 290 Land 1,629 1,629 1,530 1,530 Buildings 4,579 $ 835 3,744 4,040 $ 731 3,309 Equipment and fixtures 3,589 2,207 1,382 3,057 1,835 1,222 Building and leasehold improvements 647 290 357 656 276 380 11,117 3,332 7,785 9,951 2,842 7,109 Capital leases – buildings and equipment 95 95 – 95 91 4 $ 11,212 $ 3,427 $ 7,785 $ 10,046 $ 2,933 $ 7,113

Fixed asset impairment and accelerated depreciation charges of $7 (2004 – $22) were recognized in operating income. An additional $14 was recognized in restructuring and other charges in 2005 for charges primarily due to the plan to restructure the supply chain operations nationally (see Note 3). The majority of the charges in 2004 resulted from the repositioning of the Ontario, Canada banner portfolio. The fair values were determined using quoted market prices where available, independent offers to purchase where available or prices for similar assets.

Note 11. Goodwill

In the normal course of business, the Company may acquire from time to time franchisee stores and convert them to corporate stores. In 2005, the Company acquired 7 franchisee businesses (2004 – 5 franchisee businesses). The acquisitions were accounted for using the purchase method of accounting with the results of the businesses acquired included in the consolidated financial statements from the date of acquisition. The fair value of the net assets acquired consisted of a nominal amount of fixed assets (2004 – nominal), other assets principally inventory of $3 (2004 – $2) and goodwill of $3 (2004 – $6) for cash consideration of $5 (2004 – $6), net of accounts receivable due from the franchisees of $1 (2004 – $2).

The consolidated balance sheet as at December 31, 2005 includes $4 of goodwill of independent franchisees that were consolidated by the Company pursuant to the requirements of AcG 15.

During 2005, the Company reduced goodwill by $41 due to the resolution of certain income tax matters previously accrued for as part of the Provigo Inc. purchase equation.

The Company performed the annual impairment test for goodwill and determined that there was no impairment to the carrying value of goodwill.

In 2004, Westfair Foods Ltd. (“Westfair”), a subsidiary of the Company, redeemed its Class A shares at a price of 350 dollars per share for cash consideration of $8. Previously, the minority interest related to these Class A shares was included in other liabilities. This transaction was accounted for as a step-by-step purchase of Westfair, which resulted in the Company recognizing $8 of goodwill.

52 2005 Financial Report Loblaw Companies Limited Note 12. Other Assets

2005 2004 Franchise investments and other receivables $ 194 $ 323 Accrued benefit plan asset (note 13) 139 106 Unrealized equity forwards receivable (note 18) 30 109 Unrealized cross currency basis swaps receivable (notes 7 and 18) 168 155 Deferred charges and other 157 99 $ 688 $ 792

Note 13. Employee Future Benefits

The Company sponsors a number of pension plans, which include registered funded defined benefit pension plans, supplemental unfunded arrangements which provide pension benefits in excess of statutory limits and defined contribution pension plans. Certain obligations of the Company to these supplemental pension arrangements are secured by a standby letter of credit issued by a major Canadian bank. Its defined benefit pension plans are predominantly non-contributory and these benefits are, in general, based on career average earnings.

The Company also offers certain employees post-retirement and post-employment benefit plans and a long term disability benefit plan. Post-retirement and post-employment benefit plans are not funded, are mainly non-contributory and include health care, life insurance and dental benefits. Employees eligible for post-retirement benefits are those who retire at certain retirement ages and employees eligible for post-employment benefits are those on long term disability leave. The majority of post-retirement health care plans for current and future retirees include a limit on the total benefits payable by the Company.

The Company also contributes to various multi-employer pension plans which provide pension benefits.

The accrued benefit plan obligations and the fair value of the benefit plan assets were determined using a September 30 measurement date for accounting purposes.

The most recent actuarial valuations of the defined benefit pension plans for funding purposes (“funding valuations”) were as of December 31, 2003 for all plans except two small plans which were as of December 31, 2004. The Company is required to file funding valuations at least every three years; accordingly, the next required funding valuations will be as of December 31, 2006 and 2007, respectively.

Total cash payments made by the Company during 2005, consisting of contributions to funded defined benefit pension plans, defined contribution pension plans, multi-employer pension plans, long term disability benefit plan and benefits paid directly to beneficiaries of the unfunded defined benefit pension plans and unfunded other benefit plans, were $134 (2004 – $105).

The aggregate of the funded defined benefit pension plans and long term disability benefit plan contributions for 2006 are estimated to be $77, and may vary subject to actuarial valuations being completed. The Company also expects to make contributions in 2006 to defined contribution pension plans and multi-employer pension plans, as well as benefit payments directly to beneficiaries of the unfunded defined benefit pension plans and other unfunded benefit plans.

2005 Financial Report Loblaw Companies Limited 53 Notes to the Consolidated Financial Statements

Information on the Company’s defined benefit pension plans and other benefit plans, in aggregate, was as follows:

2005 2004

Pension Other Pension Other Benefit Plans Benefit Plans(1) Total Benefit Plans Benefit Plans(1) Total Benefit Plan Assets Fair value, beginning of year $ 838 $ 35 $ 873 $ 771 $ 30 $ 801 Actual return on plan assets 98 2 100 74 1 75 Employer contributions 61 22 83 42 18 60 Voluntary employee contributions 2 2 2 2 Benefits paid (53) (17) (70) (49) (14) (63) Other (2) (2) (2) (2) Fair value, end of year $ 944 $ 42 $ 986 $ 838 $ 35 $ 873 Accrued Benefit Plan Obligations Balance, beginning of year $ 937 $ 181 $1,118 $ 887 $ 190 $ 1,077 Current service cost 37 4 41 33 4 37 Interest cost 60 11 71 56 11 67 Benefits paid (53) (17) (70) (49) (14) (63) Actuarial loss 173 64 237 11 1 12 Plan amendments/ past service costs 2 2 1 (11) (10) Contractual termination benefits(2) 99 Curtailment gain(3) (6) (2) (8) Other (2) (2) (2) (2) Balance, end of year $ 1,155 $ 243 $ 1,398 $ 937 $ 181 $ 1,118 Deficit of Plan Assets Versus Plan Obligations $ (211) $ (201) $ (412) $ (99) $ (146) $ (245) Unamortized cost of plan amendments/past service costs 6 (7) (1) 6 (9) (3) Unamortized net actuarial loss 271 128 399 137 70 207 Net accrued benefit plan asset (liability) $ 66 $ (80) $ (14) $ 44 $ (85) $ (41) Recorded in the consolidated balance sheets as follows: Other assets (note 12) 102 37 139 78 28 106 Other liabilities (note 15) (36) (117) (153) (34) (113) (147) Net accrued benefit plan asset (liability) $ 66 $ (80) $ (14) $ 44 $ (85) $ (41)

(1) Other Benefit Plans include post-retirement, post-employment and long term disability benefits. (2) Contractual termination benefits resulted from the plan to restructure the supply chain operations nationally and were recorded in restructuring and other charges. See Note 3. (3) Certain defined benefit pension and other benefit plans affected by the plan to restructure the supply chain operations nationally were remeasured as at March 31, 2005 and costs subsequent to April 1, 2005 were determined using a discount rate of 5.75%. This resulted in a nominal impact to net earnings and curtailment gains which were offset against unamortized net actuarial losses for those plans.

54 2005 Financial Report Loblaw Companies Limited Included in the accrued benefit plan obligations and the fair value of benefit plan assets at year end are the following amounts in respect of plans with accrued benefit plan obligations in excess of benefit plan assets:

2005 2004

Pension Other Pension Other Benefit Plans Benefit Plans Benefit Plans Benefit Plans Fair Value of Benefit Plan Assets $ 944 $ 773 Accrued Benefit Plan Obligations 1,155 $ 202 873 $ 151 Deficit $ 211 $ 202 $ 100 $ 151

The significant annual weighted average actuarial assumptions used in calculating the Company’s accrued benefit plan obligations as at the measurement date of September 30 and the net defined benefit plan cost for the year were as follows:

2005 2004

Pension Other Pension Other Benefit Plans Benefit Plans Benefit Plans Benefit Plans Accrued Benefit Plan Obligations Discount rate 5.25% 5.2% 6.25% 6.1% Rate of compensation increase 3.5% 3.5% Net Defined Benefit Plan Cost Discount rate(1) 6.25% 6.1% 6.25% 6.0% Expected long term rate of return on plan assets 8.0% 5.5% 8.0% 4.5% Rate of compensation increase 3.5% 3.5%

(1) Certain defined benefit pension and other benefit plans affected by the plan to restructure the supply chain operations nationally were remeasured as at March 31, 2005 and costs subsequent to April 1, 2005 were determined using a discount rate of 5.75%. This resulted in a nominal impact to net earnings and curtailment gains which were offset against unamortized net actuarial losses for those plans.

The Company’s growth rate of health care costs, primarily drug and other medical costs, was estimated at 10.0% (2004 – 9.0%) and is assumed to decrease to 5.0% by 2013 (2004 – 5.0% by 2008) and remain at that level thereafter.

The benefit plan assets are held in trust and at September 30 consisted of the following asset categories:

Percentage of Plan Assets 2005 2004

Pension Other Pension Other Asset Category Benefit Plans Benefit Plans Benefit Plans Benefit Plans Equity securities 64% 64% Debt securities 34% 99% 34% 95% Cash and cash equivalents 2% 1% 2% 5% Total 100% 100% 100% 100%

Pension benefit plan assets include securities issued by the Company’s majority shareholder, George Weston Limited (“Weston”) having a fair value of $4 as at September 30 for each of 2005 and 2004. Other benefit plan assets do not include any Weston or Loblaw securities.

2005 Financial Report Loblaw Companies Limited 55 Notes to the Consolidated Financial Statements

The total net cost for the Company’s benefit plans and the multi-employer pension plans was as follows:

2005 2004

Pension Other Pension Other Benefit Plans Benefit Plans Benefit Plans Benefit Plans Current service cost, net of employee contributions $ 35 $ 4 $ 31 $ 4 Interest cost on plan obligations 60 11 56 11 Actual return on plan assets (98) (2) (74) (1) Actuarial loss 173 64 11 1 Plan amendments/past service costs 2 1 (11) Contractual termination benefits(1) 9 Benefit plan cost, before adjustments to recognize the long term nature of employee future benefit costs 179 79 25 4 Difference between cost arising in the year and cost recognized in the year in respect of: Return on plan assets 30 13 Actuarial (loss) gain (170) (59) (7) 5 Plan amendments/past service costs (2) 9 Net defined benefit plan cost 39 18 31 18 Defined contribution plan cost 6 6 Multi-employer pension plan cost 45 39 Net benefit plan cost $90 $18 $76 $18 Recognized in the consolidated statement of earnings as follows: Pension and other benefit plan costs $81 $18 $76 $18 Restructuring and other charges(1) 9 Net benefit plan cost $90 $18 $76 $18

(1) Contractual termination benefits resulted from the plan to restructure the supply chain operations nationally and were recorded in restructuring and other charges. See Note 3.

Sensitivity of Key Assumptions The following table outlines the key assumptions for 2005 and the sensitivity of a 1% change in each of these assumptions on the accrued benefit plan obligations and on the benefit plan cost for defined benefit pension plans and other benefit plans. The table reflects the impact on the current service and interest cost components for the discount rate and expected growth rate of health care costs assumptions.

The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of each key assumption have been calculated independently of any changes in other key assumptions. Actual experience may result in changes in a number of key assumptions simultaneously. Changes in one factor may result in changes in another, which could amplify or reduce the impact of such assumptions.

56 2005 Financial Report Loblaw Companies Limited Pension Benefit Plans Other Benefit Plans

Accrued Benefit Benefit Accrued Benefit Benefit Plan Obligations Plan Cost(1) Plan Obligations Plan Cost(1) Expected long term rate of return on plan assets 8.0% Impact of: 1% increase n/a $ (7) n/a 1% decrease n/a 7 n/a Discount rate 5.25% 6.25% 5.2% 6.1% Impact of: 1% increase $ (160) $ (8) $ (31) $ (1) 1% decrease $ 186 $ 8 $ 36 $ 3 Expected growth rate of health care costs (2) 10.0% 9.0% Impact of: 1% increase n/a n/a $ 25 $ 2 1% decrease n/a n/a $ (28) $ (3)

n/a – not applicable (1) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only. (2) Gradually decreasing to 5.0% by 2013 for the accrued benefit plan obligation and decreasing to 5.0% by 2008 for the benefit plan cost and remaining at that level thereafter.

Note 14. Long Term Debt 2005 2004 Provigo Inc. Debentures Series 1996, 8.70%, due 2006 $ 125 $ 125 Other (i) 1 5 Loblaw Companies Limited Notes 6.95%, due 2005 (ii) 200 6.00%, due 2008 390 390 5.75%, due 2009 125 125 7.10%, due 2010 300 300 6.50%, due 2011 350 350 5.40%, due 2013 200 200 6.00%, due 2014 100 100 7.10%, due 2016 300 300 6.65%, due 2027 100 100 6.45%, due 2028 200 200 6.50%, due 2029 175 175 11.4 0 %, d u e 20 31 – principal 151 151 – effect of coupon repurchase (26) (18) 6.85%, due 2032 200 200 6.54%, due 2033 200 200 8.75%, due 2033 200 200 6.05%, due 2034 200 200 6.15%, due 2035 200 200 5.90%, due 2036 (ii) 300 6.45%, due 2039 200 200 7.00%, due 2040 150 150 5.86%, due 2043 55 55 Other at a weighted average interest rate of 7.21%, due 2006 to 2043 33 43 VIE loans payable (iii) 126 Total long term debt 4,355 4,151 Less amount due within one year 161 216 $ 4,194 $ 3,935

2005 Financial Report Loblaw Companies Limited 57 Notes to the Consolidated Financial Statements

The five year schedule of repayment of long term debt based on maturity is as follows: 2006 – $161; 2007 – $24; 2008 – $406; 2009 – $140; 2010 – $314.

(i) Other of $1 (2004 – $5) represents the unamortized portion of the adjustment to fair value the Provigo Inc. Debentures. This adjustment was recorded as part of the Provigo purchase equation and was calculated using the average credit spread applicable at that time to the remaining life of the Provigo Inc. Debentures. The adjustment is being amortized over the remaining term of the Provigo Inc. Debentures.

(ii) During 2005, the Company issued $300 of 5.90% Medium Term Notes (“MTN”) due 2036 and $200 of 6.95% MTN matured and was repaid.

(iii) Pursuant to the requirements of AcG 15, the consolidated balance sheet as at December 31, 2005 includes $126 of loans payable of VIEs consolidated by the Company, $23 of which is due within one year. The loans payable represent financing obtained by eligible independent franchisees through a structure involving independent trusts to facilitate the purchase of the majority of their inventory and fixed assets, consisting mainly of fixturing and equipment. The loans payable, which have an average term to maturity of 7 years, are due and payable on demand under certain predetermined circumstances and are secured through a general security agreement made by the independent franchisees in favour of the independent funding trust. Interest is charged on a floating rate basis and prepayment of the loans may be made without penalty. The independent funding trust within the structure finances its activities through the issuance of short term asset-backed notes to third-party investors. As disclosed in Note 19, a standby letter of credit has been provided by a major Canadian bank for the benefit of the independent funding trust equal to approximately 10% of the total principal amount of the loans outstanding at any point in time. The Company has agreed to reimburse the issuing bank for any amount drawn on the standby letter of credit. In the event of a default by an independent franchisee the independent funding trust may assign the loan to the Company and draw upon the standby letter of credit. No amount has ever been drawn on the standby letter of credit.

Note 15. Other Liabilities

2005 2004

Accrued benefit plan liability (note 13) $ 153 $ 147 Stock-based compensation 13 76 Restructuring and other charges (note 3) 25 Goods and Services Tax and provincial sales tax (note 4) 16 Other 64 60 $ 271 $ 283

58 2005 Financial Report Loblaw Companies Limited Note 16. Common Share Capital (authorized – unlimited)

The changes in the common shares issued and outstanding during the year were as follows:

2005 2004

Number of Common Number of Common Common Share Common Share Shares Capital Shares Capital Issued and outstanding, beginning of year 274,255,914 $ 1,192 274,829,014 $ 1,194 Issued for stock options exercised (note 17) 25,000 1 3,000 Purchased for cancellation (226,100) (1) (576,100) (2) Issued and outstanding, end of year 274,054,814 $ 1,192 274,255,914 $ 1,192 Weighted average outstanding 274,183,823 274,253,178

Normal Course Issuer Bids (“NCIB”) During 2005, the Company purchased for cancellation 226,100 (2004 – 576,100) of its common shares for $16 (2004 – $35).

The Company intends to renew its NCIB to purchase on the Toronto Stock Exchange or enter into equity forwards to purchase up to 5% of its common shares outstanding. The Company, in accordance with the rules and by-laws of the Toronto Stock Exchange, may purchase its shares at the then market price of such shares.

Note 17. Stock-Based Compensation ($, except where otherwise indicated)

The Company maintains various types of stock-based compensation plans, which are described below.

The Company’s compensation cost recognized in operating income related to its stock option plan and the associated equity forwards and the restricted share unit plan was as follows:

($ millions) 2005 2004 Stock option plan (income)/expense $ (35) $24 Equity forwards loss/(gain) (note 18) 71 (24) Restricted share unit plan expense 7 Net stock-based compensation cost $43 $–

Stock Option Plan The Company maintains a stock option plan for certain employees. Under this plan, the Company may grant options for up to 20.4 million common shares; however, the Company has set a guideline which limits the number of stock option grants to a maximum of 5% of outstanding common shares at any time. Stock options have up to a 7-year term, vest 20% cumulatively on each anniversary date of the grant and are exercisable at the designated common share price, which is 100% of the market price of the Company’s common shares on the last trading day prior to the effective date of the grant. Each stock option is exercisable into one common share of the Company at the price specified in the terms of the option, or option holders may elect to receive in cash the share appreciation value equal to the excess of the market price at the date of exercise over the specified option price.

During 2005, the Company granted 2,247,627 (2004 – 45,000) stock options with a weighted average exercise price of $69.729 (2004 – $65.453) per common share under its existing stock option plan, which allows for settlement in shares or in the share appreciation value in cash at the option of the employee.

2005 Financial Report Loblaw Companies Limited 59 Notes to the Consolidated Financial Statements

The share appreciation value of $41 million (2004 – $33 million) was paid on the exercise of 1,135,221 (2004 – 985,395) stock options. In 2005, the Company issued 25,000 (2004 – 3,000) common shares on the exercise of stock options for cash consideration of $0.9 million (2004 – $0.1 million) for which it had recorded a stock-based compensation liability of $1 million (2004 – nominal).

At year end, a total of 5,305,422 (2004 – 4,365,958) stock options were outstanding, and represented approximately 1.9% (2004 – 1.6%) of the Company’s issued and outstanding common shares, which was within the Company’s guideline of 5%. Of the 5,305,422 outstanding options, 5,151,682 relate to stock option grants that allow for settlement in shares or in the share appreciation value in cash at the option of the employee and 153,740 relate to stock option grants, issued prior to December 30, 2001 that will be settled by issuing common shares.

A summary of the status of the Company’s stock option plan and activity was as follows:

2005 2004

Options Weighted Options Weighted (number of Average Exercise (number of Average Exercise shares) Price/Share shares) Price/Share Outstanding options, beginning of year 4,365,958 $ 45.039 5,407,026 $ 42.533 Granted 2,247,627 $ 69.729 45,000 $ 65.453 Exercised (1,160,221) $ 36.411 (988,395) $ 32.440 Forfeited/cancelled (147,942) $ 59.494 (97,673) $ 43.201 Outstanding options, end of year 5,305,422 $ 56.983 4,365,958 $ 45.039 Options exercisable, end of year 1,701,050 $ 43.251 1,736,769 $ 39.268

2005 Outstanding Options 2005 Exercisable Options

Weighted Number of Average Remaining Weighted Number of Weighted Options Contractual Average Exercise Exercisable Average Exercise Range of Exercise Prices Outstanding Life (years) Price/Share Options Price/Share $ 32.000 – $ 48.500 991,215 1 $ 35.691 938,977 $ 34.978 $ 49.050 – $ 53.600 2,059,568 4 $ 53.442 745,073 $ 53.208 $ 61.950 – $ 72.950 2,254,639 6 $ 69.578 17,000 $ 63.805

Subsequent to year end 2005, the Company granted 48,742 stock options under its current stock option plan, that allow for settlement in shares or in the share appreciation value in cash at the option of the employee, to 1 employee with an exercise price of $54.71 per common share. Including stock option grants issued subsequent to year end, total stock options outstanding represent approximately 2.0% of the Company’s issued and outstanding common shares.

Restricted Share Unit (“RSU”) Plan The Company adopted a RSU plan for certain senior employees. The RSUs entitle the employee to a cash payment after the end of each performance period, of up to 3 years, following the date of award. The RSU payment will be an amount equal to the weighted average price of a Loblaw common share on the three last trading days preceding the end of the performance period for the RSUs multiplied by the number of RSUs held by the employee.

During 2005, the Company granted 393,335 RSUs to 236 employees and 10,151 RSUs were cancelled. At year end, a total of 383,184 RSUs were outstanding.

Subsequent to year end 2005, the Company granted 644,712 RSUs to 231 employees.

60 2005 Financial Report Loblaw Companies Limited Employee Share Ownership Plan (“ESOP”) The Company maintains an ESOP which allows employees to acquire the Company’s common shares through regular payroll deductions of up to 5% of their gross regular earnings. The Company contributes an additional 25% (2004 – 15%) of each employee’s contribution to the plan. The ESOP is administered through a trust which purchases the Company’s common shares on the open market on behalf of employees. A compensation cost of $5 million (2004 – $2 million) related to this plan was recognized in operating income.

Deferred Share Units (“DSUs”) Plan Members of the Company’s Board of Directors may elect annually to receive all or a portion of their annual retainer(s) and fees in the form of DSUs, the value of which is determined by the market price of the Company’s common shares at the time the director’s annual retainer(s) or fees are earned. Upon termination of Board service, the common shares due to the director, as represented by the DSUs, will be purchased on the open market on the director’s behalf. At year end, 36,666 (2004 – 30,908) DSUs were outstanding. The year-over-year change in the deferred share units liability was minimal and was recognized in operating income.

Note 18. Financial Instruments

A summary of the Company’s outstanding financial derivative instruments is as follows:

Notional Amounts Maturing 2005 2004

2006 2007 2008 2009 2010 Thereafter Total Total Cross currency basis swaps $ 11 $ 76 $ 140 $ 31 $ 174 $ 604 $ 1,036 $ 1,114 Interest rate swaps (receive)/pay $ (43) $ 240 $ 140 $ 50 $ 50 $ 437 $ 598 Equity forwards $ 117 $ 123 $ 240 $ 236 Electricity forward contract $16

Cross Currency Basis Swaps The Company enters into cross currency basis swaps to hedge its exposure to fluctuations in the foreign currency exchange rate on a portion of its United States dollar denominated assets, principally cash, cash equivalents and short term investments.

The Company entered into cross currency basis swaps to exchange United States dollars for $1.0 billion (2004 – $1.1 billion) Canadian dollars, which mature by 2016. Currency adjustments receivable or payable arising from these swaps are settled in cash on maturity. At year end, a cumulative unrealized foreign currency exchange rate receivable of $168 (2004 – $155) was recorded in other assets.

Interest Rate Swaps The Company enters into interest rate swaps to hedge a portion of its exposure to fluctuations in interest rates. The Company’s interest rate swaps convert a net notional $437 (2004 – $598) of its floating rate investments to fixed rate investments at 4.76% (2004 – 5.80%), which mature by 2013.

Equity Forwards ($) The Company enters into equity forwards to manage its exposure to fluctuations in its stock-based compensation cost as a result of changes in the market price of its common shares. At year end 2005, the Company had cumulative equity forwards to buy 4.8 million (2004 – 4.8 million) of its common shares at an average forward price of $50.02 (2004 – $49.25) including $5.15 (2004 – $4.38) per common share of interest expense net of dividends that has been recognized in net earnings and will be paid at termination. The equity forwards allow for settlement in cash, common shares or net settlement. The Company has included a cumulative unrealized market gain of $30 million (2004 – $109 million) in other assets relating to these equity forwards.

Electricity Forward Contract The Company entered into an electricity forward contract to minimize price volatility and to maintain a portion of the Company’s electricity costs in Ontario, Canada at approximately 2001 rates. This electricity forward contract had an initial term of three years and expired in May 2005.

2005 Financial Report Loblaw Companies Limited 61 Notes to the Consolidated Financial Statements

Fair Value of Financial Instruments The fair value of a financial instrument is the estimated amount that the Company would receive or pay to terminate the instrument agreement at the reporting date. The following methods and assumptions were used to estimate the fair value of each type of financial instrument by reference to various market value data and other valuation techniques as appropriate.

The fair values of cash, cash equivalents, short term investments, accounts receivable, bank indebtedness, commercial paper, accounts payable and accrued liabilities approximated their carrying values given their short term maturities.

The fair value of the cross currency basis swaps was estimated based on the market spot exchange rates and forward interest rates and approximated their carrying value.

The fair value of long term debt issues was estimated based on the discounted cash flows of the debt at the Company’s estimated incremental borrowing rates for debt of the same remaining maturities.

The fair value of the interest rate swaps was estimated by discounting net cash flows of the swaps at market and forward interest rates for swaps of the same remaining maturities.

The fair value of the equity forwards, which approximated carrying value, was estimated by multiplying the number of the Company’s common shares outstanding under the equity forwards by the difference between the market price of its common shares and the average forward price of the outstanding forwards at year end.

In 2004, the fair value of the electricity forward contract was provided by the counterparty based on expected future electricity prices.

2005 2004

Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value Long term debt liability $ 4,355 $ 5,027 $ 4,151 $ 4,665 Interest rate swaps net (liability) asset $ (11) $ (2) $ 5 Electricity forward contract net asset $3

Counterparty Risk The Company may be exposed to losses should any counterparty to its financial derivative agreements fail to fulfill its obligations. The Company has sought to minimize potential counterparty risk and losses by conducting transactions for its derivative agreements with counterparties that have at minimum a long term A credit rating from a recognized credit agency and by placing risk adjusted limits on its exposure to any single counterparty for its financial derivative agreements. The Company has internal policies, controls and reporting processes which require ongoing assessment and corrective action, if necessary, with respect to its derivative transactions. In addition, principal amounts on cross currency basis swaps and equity forwards are each netted by agreement and there is no exposure to loss of the original notional principal amounts on the interest rate swaps and equity forwards.

Credit Risk The Company’s exposure to credit risk relates to the Company’s cash equivalents and short term investments, PC Bank’s credit card receivables and accounts receivable from franchisees, associates and independent accounts.

Credit risk associated with the Company’s cash equivalents and short term investments results from the possibility that a counterparty may default on the repayment of a security. This risk is mitigated by established policies and guidelines that require issuers of permissible investments to have at minimum a long term A credit rating from a recognized credit rating agency and that specify minimum and maximum exposures to specific issuers.

62 2005 Financial Report Loblaw Companies Limited Credit risk from PC Bank’s credit card receivables and receivables from franchisees, associates and independents results from the possibility that customers may default on their payment obligation. PC Bank manages the credit card receivable risk by employing stringent credit scoring techniques and actively monitoring the credit card portfolio. In addition, these receivables are dispersed among a large, diversified group of credit card customers. Accounts receivable from franchisees, associates and independent accounts are actively monitored on an ongoing basis and settled on a frequent basis in accordance with the terms specified in the applicable agreements.

Note 19. Contingencies, Commitments and Guarantees

The Company is involved in and potentially subject to various claims by third parties arising out of the normal course and conduct of its business including, but not limited to, product liability, labour and employment, regulatory and environmental claims. In addition, the Company is involved in and potentially subject to regular audits from federal and provincial tax authorities relating to income, capital and commodity taxes and as a result of these audits may receive assessments and reassessments.

Although such matters cannot be predicted with certainty, management currently considers the Company’s exposure to such claims and litigation, to the extent not covered by the Company’s insurance policies or otherwise provided for, not to be material to these consolidated financial statements.

There are various operating leases that have been committed to. Future minimum lease payments relating to these operating leases are as follows:

Amounts Maturing in

Thereafter 2005 2004 2006 2007 2008 2009 2010 to 2049 Total Total Operating lease payments $ 192 $ 184 $ 166 $ 146 $ 126 $ 823 $ 1,637 $ 1,400 Expected sub-lease income (44) (37) (31) (26) (19) (46) (203) (296) Net operating lease payments $ 148 $ 147 $ 135 $ 120 $ 107 $ 777 $ 1,434 $ 1,104

At year end, the Company has committed approximately $264 (2004 – $354) with respect to capital investment projects such as the construction, expansion and renovation of buildings and the purchase of real property.

The Company establishes standby letters of credit used in connection with certain obligations mainly related to real estate transactions and benefit programs. The aggregate gross potential liability related to these standby letters of credit is approximately $143 (2004 – $104). Other standby letters of credit related to the financing program for the Company’s franchisees and securitization of PC Bank’s credit card receivables have been identified as guarantees and are discussed further in the Guarantees section below.

Guarantees The Company has provided to third parties the following significant guarantees as defined pursuant to Accounting Guideline 14, “Disclosure of Guarantees”:

2005 Financial Report Loblaw Companies Limited 63 Notes to the Consolidated Financial Statements

Standby Letters of Credit A standby letter of credit for the benefit of an independent trust with respect to the credit card receivables securitization program of PC Bank has been issued by a major Canadian bank. This standby letter of credit could be drawn upon in the event of a major decline in the income flow from or in the value of the securitized credit card receivables. The Company has agreed to reimburse the issuing bank for any amount drawn on the standby letter of credit. The Company believes that the likelihood of this occurrence is remote. The aggregate gross potential liability under this arrangement, which represents 9% (2004 – 15%) of the securitized credit card receivables amount, is approximately $91 (2004 – $118).

A standby letter of credit has been issued by a major Canadian bank in the amount of $42 (2004 – $42) for the benefit of an independent funding trust which provides loans to the Company’s franchisees for their purchase of inventory and fixed assets, mainly fixturing and equipment. The amount of the standby letter of credit is based on a formula and is equal to approximately 10% of the principal amount of the loans outstanding at any point in time. In the event that an independent franchisee defaults on its loan and the Company has not, within a specified time period, assumed the loan or the default is not otherwise remedied, the independent funding trust may assign the loan to the Company and draw upon this standby letter of credit. The Company has agreed to reimburse the issuing bank for any amount drawn on the standby letter of credit.

Lease Obligations In connection with historical dispositions of certain of its assets, the Company has assigned leases to third parties. The Company remains contingently liable for these lease obligations in the event any of the assignees are in default of their lease obligations. The estimated amount for minimum rent, which does not include other lease related expenses such as property tax and common area maintenance charges, is $138 (2004 – $143).

Indemnification Provisions The Company from time to time enters into agreements in the normal course of its business, such as service and outsourcing arrangements and leases, in connection with business or asset acquisitions or dispositions. These agreements by their nature may provide for indemnification of counterparties. These indemnification provisions may be in connection with breaches of representation and warranty or with future claims for certain liabilities, including liabilities related to tax and environmental matters. The terms of these indemnification provisions vary in duration and may extend for an unlimited period of time. Given the nature of such indemnification provisions, the Company is unable to reasonably estimate its total maximum potential liability as certain indemnification provisions do not provide for a maximum potential amount and the amounts are dependent on the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, the Company has not made any significant payments in connection with these indemnification provisions.

Note 20. Related Party Transactions

The Company’s majority shareholder, George Weston Limited, and its affiliates (other than the Company) are related parties. It is the Company’s policy to conduct all transactions and settle all balances with related parties on market terms and conditions. Related party transactions include:

Inventory Purchases Purchases of inventory from related parties for resale in the distribution network represented approximately 3% (2004 – 3%) of the cost of sales, selling and administrative expenses.

64 2005 Financial Report Loblaw Companies Limited Cost Sharing Agreements George Weston Limited has entered into certain contracts with third parties for administrative and corporate services, including telecommunication services and information technology related matters on behalf of the Company. Through cost sharing agreements that have been established between the Company and George Weston Limited concerning these costs, the Company has agreed to be responsible to George Weston Limited for its proportionate share of the costs incurred on its behalf. Payments by the Company pursuant to these cost sharing agreements were approximately $22 (2004 – $21).

Real Estate Leases The Company leases certain properties from an affiliate of George Weston Limited, namely office space for approximately $4 (2004 – $3) and a property designated for future development for a total one time payment made in 2004 of $8.

Borrowings/Lendings The Company, from time to time, may borrow from or may lend to George Weston Limited on a short term basis at commercial paper rates. There were no such amounts outstanding as at year end.

Income Tax Matters From time to time, the Company and George Weston Limited and its affiliates may make elections that are permitted or required under applicable income tax legislation with respect to affiliated corporations and, as a result, may enter into agreements in that regard. These elections and accompanying agreements do not have any material impact on the Company.

Management Agreements The Company, through Glenhuron, manages certain United States cash, cash equivalents and short term investments for wholly owned non-Canadian subsidiaries of George Weston Limited. Management fees are based on market rates and included in interest expense.

Sale of Loan Portfolio During 2005, Glenhuron sold a portfolio of third-party long term loans receivable to a wholly owned subsidiary of George Weston Limited, the Company’s majority shareholder. Originally, the loans in this portfolio were acquired from third-party financial institutions in 2001. This transaction was undertaken by Glenhuron as part of its overall ongoing management of its investment portfolio.

The amount of the cash consideration of U.S. $106 was based on a fair market value of the loan portfolio and was approximately equal to carrying value. An independent review of the valuation analysis has been obtained by the Company to ensure that Glenhuron’s methodology used in arriving at fair market value was reasonable. As at the date of sale, the current portion of this loan portfolio of U.S. $13 was included in accounts receivable and the long term portion of U.S. $93 was included in other assets.

Glenhuron has entered into an agreement with the George Weston Limited subsidiary for the administration of the loan portfolio.

Electricity Forward Contract Pursuant to an agreement between the Company and George Weston Limited, George Weston Limited agreed to remain responsible for its proportionate share of all costs and liability associated with its usage of the Company’s electricity forward contract that expired during 2005.

Note 21. Other Information

Segment Information The only reportable operating segment is merchandising, which includes primarily food as well as general merchandise and drugstore products and services. All sales to external parties were generated in Canada and all fixed assets and goodwill were attributable to Canadian operations.

2005 Financial Report Loblaw Companies Limited 65 Five Year Summary (1)

Year (2) ($ millions except where otherwise indicated) 2005 2004 2003 2002 2001 Operating Results Sales 27,801 26,209 25,220 23,082 21,486 Sales excluding impact of VIEs 27,423 26,209 25,220 23,082 21,486 Adjusted EBITDA(3) 2,132 2,125 1,881 1,671 1,451 Operating income 1,401 1,652 1,467 1,303 1,136 Adjusted operating income 1,600 1,652 1,488 1,317 1,136 Interest expense 252 239 196 161 158 Net earnings 746 968 845 728 563 Financial Position Working capital 539 290 356 320 290 Fixed assets 7,785 7,113 6,390 5,557 4,931 Goodwill 1,587 1,621 1,607 1,599 1,599 Total asset s 13,761 12,949 12,113 11,047 10,025 Net debt (3) 3,901 3,828 3,707 2,932 2,699 Shareholders’ equity 5,886 5,414 4,690 4,082 3,569 Cash Flow Cash flows from operating activities 1,489 1,443 1,032 998 818 Capital investment 1,156 1,258 1,271 1,079 1,108

Per Common Share ($) Basic net earnings 2.72 3.53 3.07 2.64 2.04 Basic earnings before goodwill charges 2.72 3.53 3.07 2.64 2.20 Adjusted basic net earnings(3) 3.35 3.48 3.10 2.68 2.20 Dividend rate at year end .84 .76 .60 .48 .40 Cash flows from operating activities 5.43 5.26 3.75 3.61 2.96 Capital investment 4.22 4.59 4.62 3.91 4.01 Book value 21.48 19.74 17.07 14.79 12.92 Market price at year end 56.37 72.02 67.85 54.00 51.85 Financial Ratios Adjusted EBITDA margin (%)(3) 7.8 8.1 7.5 7.2 6.8 Operating margin (%) 5.0 6.3 5.8 5.6 5.3 Adjusted operating margin (%) 5.8 6.3 5.9 5.7 5.3 Return on average total assets (%)(3) 11.2 14.2 13.9 13.8 13.4 Return on average shareholders’ equity (%) 13.2 19.2 19.3 19.0 16.8 Interest coverage 5.6 6.9 7.5 8.1 7.2 Net debt(3) to equity .66 .71 .79 .72 .76 Cash flows from operating activities to net debt(3) .38 .38 .28 .34 .30 Price/net earnings ratio at year end 20.7 20.4 22.1 20.5 25.4 Market/book ratio at year end 2.6 3.6 4.0 3.7 4.0

(1) For financial definitions and ratios refer to the Glossary of Terms on page 68. (2) 2003 contained 53 weeks. (3) See Non-GAAP Financial Measures on page 33. (4) Certain prior years’ information was reclassified to conform with current year’s presentation. (5) Basic earnings before goodwill charges per common share.

66 2005 Financial Report Loblaw Companies Limited Shareholders’ Equity and Net Debt(3) Cash Flows from Operating Activities ($ millions) and Capital Investment ($ millions)

$6,000 $1,500

4,500 1,125

3,000 750

1,500 375

0 0 2001 2002 2003(2) 2004 2005 2001 2002 2003(2) 2004 2005 Shareholders’ Equity Cash Flows from Operating Activities Net Debt (3) Capital Investment

Basic Net Earnings and Adjusted Basic Net Common Share Market Price Range (3) Earnings per Common Share ($) ($)

$ $3.60 $84

2.70 63

1.80 42

.90 21

.00 0 2001(5) 2002 2003(2) 2004 2005 2001 2002 2003(2) 2004 2005 Basic Net Earnings per Common Share Common Share Market Price Range Adjusted Basic Net Earnings per Common Share(3)

2005 Financial Report Loblaw Companies Limited 67 Glossary of Terms

Term Definition Term Definition Adjusted basic Basic net earnings per common share adjusted for Market/book ratio Market price per common share at year end divided net earnings items that affect the comparability of the financial at year end by book value per common share at year end. per common share results and are not a result of ongoing operations Minor expansion Expansion of a store that results in an increase in (see Non-GAAP Financial Measures on page 33). square footage that is less than or equal to 25% of Adjusted EBITDA Adjusted operating income before depreciation the square footage of the store prior to the expansion. and amortization (see Non-GAAP Financial Net debt Bank indebtedness, commercial paper, long term Measures on page 33). debt due within one year, long term debt and Adjusted EBITDA margin Adjusted EBITDA divided by sales excluding impact of debt equivalents less cash, cash equivalents and VIEs (see Non-GAAP Financial Measures on page 33). short term investments (see Non-GAAP Financial Adjusted operating Operating income adjusted for items that affect Measures on page 33). income the comparability of the financial results and are Net debt to equity Net debt divided by total shareholders’ equity. not a result of ongoing operations (see Non-GAAP New store A newly constructed store, conversion or Financial Measures on page 33). major expansion. Adjusted operating Adjusted operating income divided by sales Operating income Earnings before interest expense and income margin excluding impact of VIEs (see Non-GAAP Financial income taxes. Measures on page 33). Operating margin Operating income divided by sales. Annual Report For 2005, the Annual Report consists of the Annual Summary and the Financial Report. Price/net earnings ratio Market price per common share at year end divided at year end by basic net earnings per common share for the year. Basic net earnings per Net earnings available to common shareholders common share divided by the weighted average number of common Renovation A capital investment in a store resulting in no shares outstanding during the year. change to the store square footage. Basic earnings per Net earnings available to common shareholders Retail sales Combined sales of stores owned by the common share before before goodwill charges, net of tax, divided Company and those owned by the Company’s goodwill charges by the weighted average number of common shares independent franchisees. outstanding during the year. Retail square footage Retail square footage includes corporate and Book value per Shareholders’ equity divided by the number of independent franchised stores. common share common shares outstanding at year end. Return on average Operating income divided by average total Capital investment Fixed asset purchases. total assets assets excluding cash, cash equivalents and short term investments (see Non-GAAP Capital investment Capital investment divided by the weighted Financial Measures on page 33). per common share average number of common shares outstanding during the year. Return on average Net earnings available to common shareholders shareholders’ equity divided by average total common shareholders’ Cash flows from Cash flows from operating activities divided by equity. operating activities the weighted average number of common shares per common share outstanding during the year. Sales excluding Total sales less sales attributable to the consolidation impact of VIEs of VIEs pursuant to AcG 15 (see Non-GAAP Cash flows from Cash flows from operating activities divided by Financial Measures on page 33 and Note 2 to the operating activities net debt. consolidated financial statements). to net debt Same-store sales Retail sales from the same physical location Control label A brand and associated trademark that is owned for stores in operation in that location in both by the Company for use in connection with its periods being compared but excluding sales from a own products and services. store that has undergone a conversion or major Conversion A store that changes from one Company banner to expansion in the period. another Company banner. Variable interest An entity that either does not have sufficient equity Corporate stores sales Sales by corporate stores divided by the average entity (“VIE”) at risk to finance its activities without subordinated per average square foot corporate stores’ square footage at year end. financial support or where the holders of the equity Diluted net earnings Net earnings available to common shareholders divided at risk lack the characteristics of a controlling per common share by the weighted average number of common shares financial interest (see Note 2 to the consolidated outstanding during the period minus the dilutive impact financial statements). of outstanding stock option grants at period end. Weighted average The number of common shares outstanding Dividend rate per Dividend per common share declared in the common shares determined by relating the portion of time within common share at fourth quarter multiplied by four. outstanding the year the common shares were outstanding year end to the total time in that year. Gross margin Sales less cost of sales and inventory shrinkage Working capital Total current assets less total current liabilities. divided by sales. Year A fiscal year ends on the Saturday closest to Interest coverage Operating income divided by interest expense. December 31, usually 52 weeks in duration, but includes 53 weeks every 5 to 6 years. The year Major expansion Expansion of a store that results in an increase ended January 3, 2004 contained 53 weeks. in square footage that is greater than 25% of the square footage of the store prior to the expansion.

68 2005 Financial Report Loblaw Companies Limited Shareholder and Corporate Information

National Head Office Common Dividend Policy Value of Common Shares and Store Support Centre It is the Company’s policy to maintain a dividend For capital gains purposes, the valuation Loblaw Companies Limited payment equal to approximately 20% to 25% of the day (December 22, 1971) cost base for the Company 1 President’s Choice Circle prior year’s adjusted basic net earnings per is $0.958 per common share. The value on Brampton, Canada common share.(1) February 22, 1994 was $7.67 per common share. L6Y 5S5 Common Dividend Dates Registrar and Transfer Agent Tel: (905) 459-2500 The declaration and payment of quarterly dividends Computershare Investor Services Inc. Fax: (905) 861-2206 are made subject to approval by the Board of 100 University Avenue Internet: www.loblaw.ca Directors. The anticipated record and payment Toronto, Canada Registered Office dates for 2006 are: M5J 2Y1 22 St. Clair Avenue East Tel: (416) 263-9200 Record Date Payment Date Toronto, Canada Toll free: 1-800-663-9097 M4T 2S7 March 15 April 1 Fax: (416) 263-9394 Tel: (416) 922-8500 June 15 July 1 Toll free fax: 1-888-453-0330 Fax: (416) 922-7791 Sept. 15 Oct. 1 To change your address, eliminate multiple mailings, Dec. 15 Dec. 30 Stock Exchange Listing or for other shareholder account inquiries, please and Symbol contact Computershare Investor Services Inc. Normal Course Issuer Bid The Company’s common shares are listed The Company has a Normal Course Issuer Bid on Independent Auditors on the Toronto Stock Exchange and trade under the Toronto Stock Exchange. KPMG LLP the symbol “L”. Chartered Accountants Common Shares Toronto, Canada 63% of the Company’s common shares are Annual Meeting owned beneficially by W. Galen Weston and Loblaw Companies Limited Annual Meeting of George Weston Limited. Shareholders will be held on Thursday, May 4, 2006 At year end 2005 there were 274,054,814 at 11:00 a.m. at the Metro Toronto Convention common shares outstanding, 5,124 registered Centre, Constitution Hall, Toronto, Canada. common shareholders and 100,737,979 common shares available for public trading. The average daily trading volume of the Company’s common shares for 2005 was 322,169.

Trademarks Additional financial information has been filed Ce rapport est disponible en français. Loblaw Companies Limited and its subsidiaries electronically with various securities regulators in own a number of trademarks. Several subsidiaries Canada through the System for Electronic Document This Financial Report was printed in Canada are licensees of additional trademarks. These Analysis and Retrieval (SEDAR) and with the Office on Husky Offset, manufactured elemental chlorine-free, at a mill independently certified as meeting the trademarks are the exclusive property of Loblaw of the Superintendent of Financial Institutions (OSFI) procurement provisions of the Sustainable Forestry Companies Limited or the licensor and where as the primary regulator for the Company’s Initiative® (SFI) standard. used in this report are in italics. subsidiary, President’s Choice Bank. The Company holds an analyst call shortly following the release of Investor Relations its quarterly results. These calls are archived in the Shareholders, security analysts and investment Investor Zone section of the Company’s website. professionals should direct their requests to Geoffrey H. Wilson, Senior Vice President, Investor Relations and Public Affairs at the Company’s National Head Office or by e-mail at [email protected]

(1) See Non-GAAP Financial Measures on page 33. Loblaw Companies Limited 1 President’s Choice Circle Brampton, Canada L6Y 5S5

Tel: (905) 459-2500 Fax: (905) 861-2206

loblaw.ca